form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended June 30,
2007
|
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the transition period from
to
|
Commission
file number 0-22418
_______________
ITRON,
INC.
(Exact
name of registrant as specified in its charter)
____________________
|
|
Washington
|
91-1011792
|
(State
of incorporation)
|
(I.R.S.
Employer Identification
Number)
|
2111
N. Molter Road
Liberty
Lake, Washington 99019
(509)
924-9900
(Address
and telephone number of registrant’s principal executive
offices)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer ¨Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
As
of July 31, 2007, there were
outstanding 30,328,207 shares of the registrant’s common stock, no par value,
which is the only class of common stock of the registrant.
Table
of Contents
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Page
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1
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2
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3
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4
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31
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42
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44
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45
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45
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45
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45
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46
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47
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Item
1: Financial Statements (Unaudited)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands, except per share data)
|
|
Revenues
|
|
$ |
401,559
|
|
|
$ |
163,810
|
|
|
$ |
549,470
|
|
|
$ |
319,363
|
|
Cost
of revenues
|
|
|
276,845
|
|
|
|
94,778
|
|
|
|
363,431
|
|
|
|
183,557
|
|
Gross
profit
|
|
|
124,714
|
|
|
|
69,032
|
|
|
|
186,039
|
|
|
|
135,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
34,393
|
|
|
|
16,321
|
|
|
|
49,313
|
|
|
|
31,802
|
|
Product
development
|
|
|
25,521
|
|
|
|
14,920
|
|
|
|
41,342
|
|
|
|
27,790
|
|
General
and administrative
|
|
|
27,387
|
|
|
|
12,519
|
|
|
|
41,631
|
|
|
|
24,641
|
|
Amortization
of intangible assets
|
|
|
25,223
|
|
|
|
7,612
|
|
|
|
32,263
|
|
|
|
14,925
|
|
In-process
research and development
|
|
|
35,551
|
|
|
|
-
|
|
|
|
35,551
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
148,075
|
|
|
|
51,372
|
|
|
|
200,100
|
|
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|
99,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(23,361 |
) |
|
|
17,660
|
|
|
|
(14,061 |
) |
|
|
36,648
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,216
|
|
|
|
360
|
|
|
|
8,305
|
|
|
|
722
|
|
Interest
expense
|
|
|
(22,927 |
) |
|
|
(2,585 |
) |
|
|
(28,424 |
) |
|
|
(8,331 |
) |
Other
income (expense), net
|
|
|
5,433
|
|
|
|
(241 |
) |
|
|
6,941
|
|
|
|
(689 |
) |
Total
other income (expense)
|
|
|
(15,278 |
) |
|
|
(2,466 |
) |
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|
(13,178 |
) |
|
|
(8,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income
(loss) before income taxes
|
|
|
(38,639 |
) |
|
|
15,194
|
|
|
|
(27,239 |
) |
|
|
28,350
|
|
Income
tax benefit (provision)
|
|
|
14,759
|
|
|
|
(4,990 |
) |
|
|
10,539
|
|
|
|
(11,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(23,880 |
) |
|
$ |
10,204
|
|
|
$ |
(16,700 |
) |
|
$ |
17,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.79 |
) |
|
$ |
0.40
|
|
|
$ |
(0.58 |
) |
|
$ |
0.68
|
|
Diluted
|
|
$ |
(0.79 |
) |
|
$ |
0.39
|
|
|
$ |
(0.58 |
) |
|
$ |
0.66
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Weighted
average number of shares outstanding
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|
|
|
|
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Basic
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|
30,068
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|
|
|
25,415
|
|
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|
28,641
|
|
|
|
25,237
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|
Diluted
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|
30,068
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|
|
|
26,360
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|
|
|
28,641
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|
|
|
26,216
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|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
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|
ASSETS
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|
Current
assets
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|
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|
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Cash
and cash equivalents
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|
$ |
105,873
|
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|
$ |
361,405
|
|
Short-term
investments, held to maturity
|
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|
-
|
|
|
|
34,583
|
|
Accounts
receivable, net
|
|
|
325,970
|
|
|
|
109,924
|
|
Inventories
|
|
|
171,141
|
|
|
|
52,496
|
|
Deferred
income taxes, net
|
|
|
25,525
|
|
|
|
20,916
|
|
Other
|
|
|
48,521
|
|
|
|
17,121
|
|
Total
current assets
|
|
|
677,030
|
|
|
|
596,445
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
309,954
|
|
|
|
88,689
|
|
Intangible
assets, net
|
|
|
623,375
|
|
|
|
112,682
|
|
Goodwill
|
|
|
1,248,794
|
|
|
|
126,266
|
|
Prepaid
debt fees
|
|
|
32,159
|
|
|
|
13,161
|
|
Deferred
income taxes, net
|
|
|
88,814
|
|
|
|
47,400
|
|
Other
|
|
|
15,123
|
|
|
|
3,879
|
|
Total
assets
|
|
$ |
2,995,249
|
|
|
$ |
988,522
|
|
|
|
|
|
|
|
|
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|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
210,203
|
|
|
$ |
35,803
|
|
Accrued
expenses
|
|
|
71,032
|
|
|
|
6,402
|
|
Wages
and benefits payable
|
|
|
59,218
|
|
|
|
24,214
|
|
Taxes
payable
|
|
|
23,834
|
|
|
|
1,717
|
|
Current
portion of debt
|
|
|
11,561
|
|
|
|
-
|
|
Current
portion of warranty
|
|
|
18,861
|
|
|
|
7,999
|
|
Unearned
revenue
|
|
|
30,701
|
|
|
|
27,449
|
|
Total
current liabilities
|
|
|
425,410
|
|
|
|
103,584
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,611,027
|
|
|
|
469,324
|
|
Warranty
|
|
|
17,329
|
|
|
|
10,149
|
|
Pension
plan and other employee benefits
|
|
|
65,040
|
|
|
|
-
|
|
Deferred
income taxes, net
|
|
|
210,390
|
|
|
|
-
|
|
Other
obligations
|
|
|
50,239
|
|
|
|
14,483
|
|
Total
liabilities
|
|
|
2,379,435
|
|
|
|
597,540
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
598,860
|
|
|
|
351,018
|
|
Accumulated
other comprehensive income (loss), net
|
|
|
(4,722 |
) |
|
|
1,588
|
|
Retained
earnings
|
|
|
21,676
|
|
|
|
38,376
|
|
Total
shareholders' equity
|
|
|
615,814
|
|
|
|
390,982
|
|
Total
liabilities and shareholders' equity
|
|
$ |
2,995,249
|
|
|
$ |
988,522
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(16,700 |
) |
|
$ |
17,273
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
47,156
|
|
|
|
22,291
|
|
In-process
research and development
|
|
|
35,551
|
|
|
|
-
|
|
Employee
stock plans income tax benefits
|
|
|
5,773
|
|
|
|
11,686
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(5,029 |
) |
|
|
(8,371 |
) |
Stock-based
compensation
|
|
|
5,849
|
|
|
|
4,096
|
|
Amortization
of prepaid debt fees
|
|
|
2,813
|
|
|
|
3,155
|
|
Deferred
income taxes, net
|
|
|
(30,133 |
) |
|
|
(953 |
) |
Other,
net
|
|
|
394
|
|
|
|
435
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(12,604 |
) |
|
|
18,038
|
|
Inventories
|
|
|
17,983
|
|
|
|
(9,575 |
) |
Trade
payables, accrued expenses and taxes payable
|
|
|
25,811
|
|
|
|
1,142
|
|
Wages
and benefits payable
|
|
|
(7,299 |
) |
|
|
(3,623 |
) |
Unearned
revenue
|
|
|
(4,348 |
) |
|
|
4,230
|
|
Warranty
|
|
|
391
|
|
|
|
1,678
|
|
Other
long-term obligations
|
|
|
(47 |
) |
|
|
(181 |
) |
Other,
net
|
|
|
(2,642 |
) |
|
|
(4,550 |
) |
Net
cash provided by operating activities
|
|
|
62,919
|
|
|
|
56,771
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from the maturities of investments, held to maturity
|
|
|
35,000
|
|
|
|
-
|
|
Acquisitions
of property, plant and equipment
|
|
|
(18,306 |
) |
|
|
(14,420 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(1,715,626 |
) |
|
|
(7,778 |
) |
Other,
net
|
|
|
5,897
|
|
|
|
1,444
|
|
Net
cash used in investing activities
|
|
|
(1,693,035 |
) |
|
|
(20,754 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
1,159,027
|
|
|
|
-
|
|
Payments
on debt
|
|
|
(2,890 |
) |
|
|
(42,703 |
) |
Issuance
of common stock
|
|
|
236,220
|
|
|
|
11,326
|
|
Excess
tax benefits from stock-based compensation
|
|
|
5,029
|
|
|
|
8,371
|
|
Prepaid
debt fees
|
|
|
(23,058 |
) |
|
|
(62 |
) |
Net
cash provided by (used in) financing activities
|
|
|
1,374,328
|
|
|
|
(23,068 |
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
256
|
|
|
|
-
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(255,532 |
) |
|
|
12,949
|
|
Cash
and cash equivalents at beginning of period
|
|
|
361,405
|
|
|
|
33,638
|
|
Cash
and cash equivalents at end of period
|
|
$ |
105,873
|
|
|
$ |
46,587
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
3,506
|
|
|
$ |
3,103
|
|
Pre-acquisition
costs incurred but not yet paid
|
|
|
1,006
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
7,425
|
|
|
$ |
833
|
|
Interest
|
|
|
31,272
|
|
|
|
5,623
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2007
(Unaudited)
In
this
Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
Note
1: Summary of Significant Accounting Policies
Basis of Consolidation
The
condensed consolidated financial statements presented in this Quarterly Report
on Form 10-Q are unaudited and reflect entries necessary for the fair
presentation of the Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2007 and 2006, Condensed Consolidated
Balance Sheets as of June 30, 2007 and December 31, 2006 and Condensed
Consolidated Statements of Cash Flows for the six months ended June 30, 2007
and
2006 of Itron and our consolidated subsidiaries. All entries required for the
fair presentation of the financial statements are of a normal recurring nature.
Intercompany transactions and balances are eliminated upon
consolidation.
We
consolidate all entities in which we have a greater than 50% ownership interest.
We also consolidate entities in which we have a 50% or less investment and
over
which we have control. We use the equity method of accounting for entities
in
which we have a 50% or less investment and exercise significant influence.
Entities in which we have less than a 20% investment and do not exercise
significant influence are accounted for under the cost method. We consider
for
consolidation any variable interest entity of which we are the primary
beneficiary. We have no investments in variable interest entities.
Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) have been condensed or omitted pursuant to
the
rules and regulations of the Securities and Exchange Commission (SEC) regarding
interim results. These condensed consolidated financial statements should be
read in conjunction with the 2006 audited financial statements and notes
included in our Annual Report on Form 10-K, as filed with the SEC on February
23, 2007. The results of operations for the three and six months ended June
30,
2007 are not necessarily indicative of the results expected for the full fiscal
year or for any other fiscal period.
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris),
which is reported as our Actaris operating segment. The operating results of
this acquisition are included in our condensed consolidated financial statements
commencing on the date of acquisition (see Note 4).
Cash and Cash Equivalents
We
consider all highly liquid instruments with remaining maturities of three months
or less at the date of acquisition to be cash equivalents. Cash equivalents
are
recorded at cost, which approximates fair value.
Short-Term Investments
Investment
securities are classified into one of three categories: held to maturity,
trading or available for sale. Debt securities that we have the intent and
ability to hold to maturity are classified as held to maturity and are reported
at amortized cost (including amortization of premium or accretion of discount).
Investment purchases and sales are accounted for on a trade date basis. Market
value at a period end is based upon quoted market prices for each security.
Realized gains and losses are determined using the specific identification
method and are included in earnings. Premiums and discounts are recognized
in
interest income using the effective interest method over the terms of the
securities. At June 30, 2007, we held no short-term investments.
The investments held at December 31, 2006 matured during the first quarter
of 2007.
Derivative
Instruments
We
account for derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), as amended. All derivative
instruments, whether designated in hedging relationships or not, are required
to
be recorded on the Condensed Consolidated Balance Sheets at fair value as either
assets or liabilities. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative
is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded as a component of other comprehensive
income (loss) and are recognized in earnings when the hedged item affects
earnings. Ineffective portions of fair value changes or derivative instruments
that do not qualify for hedging activities are recognized in earnings.
Derivatives are not used for trading or speculative purposes.
On
February 25, 2007, we signed a stock purchase agreement to acquire Actaris
and
entered into foreign currency range forward contracts (transactions where put
options were sold and call options were purchased) to reduce our exposure to
declines in the value of the U.S. dollar and pound sterling relative to the
euro
denominated purchase price. Under SFAS 133, the Actaris stock purchase agreement
is considered an unrecognized firm commitment; therefore, these foreign currency
range forward contracts can not be designated as fair value hedges. In April
2007, we completed the acquisition of Actaris and realized a $2.8 million gain
in other income (expense) from the termination of the foreign currency range
forward contracts.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded for invoices issued to customers in accordance with
our
contractual arrangements. Interest and late payment fees are minimal. Unbilled
receivables are recorded when revenues are recognized upon product shipment
or
service delivery and invoicing occurs at a later date. The allowance for
doubtful accounts is based on our historical experience of bad debts and our
specific review of outstanding receivables at period end. Accounts receivable
are written-off against the allowance when we believe an account, or a portion
thereof, is no longer collectible.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method.
Cost includes raw materials and labor, plus applied direct and indirect costs,
including those costs required under SFAS 151, Inventory Costs—an amendment
of ARB 43, Chapter 4 (SFAS 151), which was effective for inventory costs
incurred on or after January 1, 2006. Service inventories consist primarily
of
subassemblies and components necessary to support post-sale maintenance. A
large
portion of our low-volume manufacturing and all of our domestic handheld meter
reading unit repair services are provided by an outside vendor.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally thirty years for buildings and three
to
five years for equipment, computers and furniture. Leasehold improvements are
amortized over the term of the applicable lease, including renewable periods
if
reasonably assured, or over the useful lives, whichever is shorter. Costs
related to internally developed software and software purchased for internal
uses are capitalized in accordance with Statement of Position 98-1,
Accounting for Costs of Computer Software Developed or Obtained for Internal
Use. Repair and maintenance costs are expensed as incurred. We have no
major planned maintenance activities.
We
review
long-lived assets for impairment whenever events or circumstances indicate
the
carrying amount of an asset may not be recoverable. There were no significant
impairments in the three and six months ended June 30, 2007 and 2006. If there
was an indication of impairment, management would prepare an estimate of future
undiscounted cash flows expected to result from the use of the asset over its
remaining economic life and its eventual disposition. If these cash flows were
less than the carrying amount of the asset, an impairment loss would be
recognized to write down the asset to its estimated fair value. Assets held
for
sale are classified within other current assets in the Condensed Consolidated
Balance Sheets and are reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated.
Prepaid Debt Fees
Prepaid
debt fees represent the capitalized direct costs incurred related to the
issuance of debt and are recorded in other noncurrent assets. These costs are
amortized to interest expense over the lives of the respective borrowings using
the effective interest method. Debt fees associated with convertible notes
are
amortized through the date of the earliest put or conversion option. When debt
is repaid early, the portion of unamortized prepaid debt fees related to the
early principal repayment is written-off and included in interest expense in
the
Condensed Consolidated Statements of Operations.
Business
Combinations
In
accordance with SFAS 141, Business Combinations, we record the results
of operations of an acquired business from the date of acquisition. Net assets
of the company acquired and intangible assets that arise from contractual/legal
rights, or are capable of being separated, are recorded at their fair values
as
of the date of acquisition. The balance of the purchase price, after fair value
allocations to all identified assets and liabilities, represents goodwill.
Amounts allocated to in-process research and development (IPR&D) are
expensed in the period of acquisition.
Goodwill and Intangible Assets
Goodwill
is tested for impairment as of October 1 of each year, or more frequently,
if a
significant impairment indicator occurs under the guidance of SFAS 142,
Goodwill and Other Intangible Assets (SFAS 142). Goodwill is assigned
to our reporting units based on the expected benefit from the synergies arising
from each business combination, determined by using certain financial metrics,
including the incremental discounted cash flows associated with each reporting
unit. Intangible assets with a finite life are amortized based on estimated
discounted cash flows unless discounted cash flows can not be relied upon,
in
which case the intangible assets are amortized straight-line over their
estimated useful lives. Intangible assets are tested for impairment when events
or changes in circumstances indicate the carrying value may not be recoverable.
We use estimates in determining the value of goodwill and intangible assets,
including estimates of useful lives of intangible assets, discounted future
cash
flows and fair values of the related operations. In testing goodwill for
impairment, we forecast discounted future cash flows at the reporting unit
level
based on estimated future revenues and operating costs, which take into
consideration factors such as existing backlog, expected future orders, supplier
contracts and general market conditions.
Warranty
We
offer
standard warranties on our hardware products and large application software
products. Standard warranty accruals represent the estimated cost of projected
warranty claims and are based on historical and projected product performance
trends, business volume assumptions, supplier information and other business
and
economic projections. Testing of new products in the development stage helps
identify and correct potential warranty issues prior to manufacturing.
Continuing quality control efforts during manufacturing reduce our exposure
to
warranty claims. If our quality control efforts fail to detect a fault in one
of
our products, we could experience an increase in warranty claims. We track
warranty claims to identify potential warranty trends. If an unusual trend
is
noted, an additional warranty accrual may be assessed and recorded when a
failure event is probable and the cost can be reasonably estimated. Management
continually evaluates the sufficiency of the warranty provisions and makes
adjustments when necessary. The warranty allowances may fluctuate due to changes
in estimates for material, labor and other costs we may incur to replace
projected product failures, and we may incur additional warranty and related
expenses in the future with respect to new or established products. The
long-term warranty balance includes estimated warranty claims beyond one
year.
A
summary
of the warranty accrual account activity is as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
19,840
|
|
|
$ |
15,111
|
|
|
$ |
18,148
|
|
|
$ |
15,276
|
|
Actaris
acquisition opening balance
|
|
|
17,769
|
|
|
|
-
|
|
|
|
17,769
|
|
|
|
-
|
|
New
product warranties
|
|
|
1,013
|
|
|
|
734
|
|
|
|
1,709
|
|
|
|
1,319
|
|
Other
changes/adjustments to warranties
|
|
|
338
|
|
|
|
3,147
|
|
|
|
3,274
|
|
|
|
4,512
|
|
Claims
activity
|
|
|
(2,655 |
) |
|
|
(2,038 |
) |
|
|
(4,597 |
) |
|
|
(4,153 |
) |
Effect
of change in exchange rates
|
|
|
(115 |
) |
|
|
-
|
|
|
|
(113 |
) |
|
|
-
|
|
Ending
balance, June 30
|
|
|
36,190
|
|
|
|
16,954
|
|
|
|
36,190
|
|
|
|
16,954
|
|
Less:
current portion of warranty
|
|
|
(18,861 |
) |
|
|
(7,927 |
) |
|
|
(18,861 |
) |
|
|
(7,927 |
) |
Long-term
warranty
|
|
$ |
17,329
|
|
|
$ |
9,027
|
|
|
$ |
17,329
|
|
|
$ |
9,027
|
|
Total
warranty expense, which consists of new product warranties issued and other
changes and adjustments to warranties, totaled approximately $1.4 million and
$3.9 million for the three months ended June 30, 2007 and 2006 and approximately
$5.0 million and $5.8 million for the six months ended June 30, 2007 and 2006,
respectively. Warranty expense is classified within cost of
revenues.
Contingencies
An
estimated loss for a contingency is recorded if it is probable that an asset
has
been impaired or a liability has been incurred and the amount of the loss can
be
reasonably estimated. We evaluate, among other factors, the degree of
probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. Changes in these factors could materially affect
our financial position and results of operations.
Defined
Benefit Pension Plans
As
part
of the Actaris acquisition, we assumed Actaris’ defined benefit pension plans.
Actaris sponsors both funded and unfunded non-U.S. defined benefit pension
plans. Financial Accounting Standards Board (FASB) Statement 87, Employers'
Accounting for Pensions, as amended by SFAS 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans (SFAS
158), requires the assignment of the purchase price to individual
assets acquired and liabilities assumed to include a liability for the projected
benefit obligation in excess of plan assets or an asset for plan assets in
excess of the projected benefit obligation. SFAS 158 also requires employers
to
recognize on a prospective basis the funded status of their defined benefit
pension plans on their consolidated balance sheet and recognize as a component
of other comprehensive income (loss), net of tax, the actuarial gains or losses,
prior service costs or credits and transition assets or obligations, if any,
that arise during the period but are not recognized as components of net
periodic benefit cost. See Note 8 for additional disclosures required by
SFAS 158.
Income
Taxes
We
account for income taxes using the asset and liability method. Under this
method, deferred income taxes are recorded for the temporary differences between
the financial reporting basis and tax basis of our assets and liabilities.
These
deferred taxes are measured using the tax rates expected to be in effect when
the temporary differences reverse. We establish a valuation allowance for a
portion of the deferred tax asset when we believe it is more likely than not
that a portion of the deferred tax asset will not be utilized. Deferred tax
liabilities have been recorded on undistributed earnings of foreign subsidiaries
that are not permanently reinvested.
We
adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes – an Interpretation of FASB 109 (FIN 48) on January 1,
2007. This interpretation addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, we may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based solely on
the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognizing, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures (see Note 9). We recognize interest expense
and
penalties accrued related to unrecognized tax benefits in our provision for
income taxes.
Foreign Exchange
Our
condensed consolidated financial statements are reported in U.S. dollars. Assets
and liabilities of foreign subsidiaries are translated to U.S. dollars at the
exchange rates in effect on the balance sheet date. Revenues and expenses for
these subsidiaries are translated to U.S. dollars using an average rate for
the
relevant reporting period. Translation adjustments resulting from this process
are included, net of tax, in accumulated other comprehensive income (loss)
in
shareholders’ equity. Gains and losses that arise from exchange rate
fluctuations for balances that are not denominated in the local currency are
included in the Condensed Consolidated Statements of Operations. Currency gains
and losses of intercompany balances deemed to be long-term in nature and
considered to be hedges of the net investment in foreign subsidiaries are
included, net of tax, in accumulated other comprehensive income (loss) in
shareholders’ equity.
Revenue Recognition
Revenues
consist of hardware sales, software license fees, custom software development
services, field and project management service and engineering, consulting,
implementation, installation, professional services and post-sale maintenance
support. Outsourcing services include installation, operation and maintenance
of
meter reading systems to provide meter information to a customer for billing
and
management purposes. Outsourcing services can be provided for systems we own,
as
well as those owned by our customers.
Revenue
arrangements with multiple deliverables are divided into separate units of
accounting if the delivered item(s) have value to the customer on a standalone
basis, there is objective and reliable evidence of fair value of the undelivered
item(s) and delivery/performance of the undelivered item(s) is probable. The
total arrangement consideration is allocated among the separate units of
accounting based on their relative fair values and the applicable revenue
recognition criteria considered for each unit of accounting. For our standard
contract arrangements that combine deliverables such as hardware, meter reading
system software, installation and project management services, each deliverable
is generally considered a single unit of accounting. The amount allocable to
a
delivered item is limited to the amount that we are entitled to collect and
is
not contingent upon the delivery/performance of additional items.
Revenues
are recognized when (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services have been rendered, (3) the sales price is
fixed or determinable and (4) collectibility is reasonably assured. Hardware
revenues are generally recognized at the time of shipment, receipt by customer,
or, if applicable, upon completion of customer acceptance provisions. For
software arrangements with multiple elements, revenue recognition is also
dependent upon the availability of vendor-specific objective evidence (VSOE)
of
fair value for each of the elements. The lack of VSOE, or the existence of
extended payment terms or other inherent risks, may affect the timing of revenue
recognition for software arrangements. If implementation services are essential
to a software arrangement, revenue is recognized using either the percentage
of
completion methodology if project costs can be estimated or the completed
contract methodology if project costs can not be reliably estimated. Hardware
and software post-sale maintenance support fees are recognized ratably over
the
life of the related service contract.
Unearned
revenue is recorded for products or services that have not been provided
and
have been paid for by a customer, or when products or services have been
provided but the criteria for revenue recognition have not been met. Shipping
and handling costs and incidental expenses, which are commonly referred to
as
"out-of-pocket" expenses, billed to customers are recorded as revenue, with
the
associated costs charged to cost of revenues. We record sales, use and value
added taxes billed to our customers on a net basis in our Condensed Consolidated
Statements of Operations.
Product and Software Development Costs
Product
and software development costs primarily include payroll and third party
contracting fees. For software we develop to be marketed or sold, SFAS 86,
Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed (as amended), requires the capitalization of development
costs after technological feasibility is established. Due to the relatively
short period of time between technological feasibility and the completion of
product and software development, and the immaterial nature of these costs,
we
generally do not capitalize product and software development
expenses.
Earnings
Per Share
Basic
earnings per share (EPS) is calculated using net income (loss) divided by the
weighted average common shares outstanding during the period. We compute
dilutive earnings per share by adjusting the weighted average number of common
shares outstanding to consider the effect of potentially dilutive securities,
including stock-based awards and our convertible senior subordinated notes.
Shares that are contingently issuable are included in the dilutive EPS
calculation as of the beginning of the period when all necessary conditions
have
been satisfied. For periods in which we report a net loss, diluted net loss
per
share is the same as basic net loss per share.
Stock-Based
Compensation
SFAS
123(R), Share-Based Payment (SFAS 123(R)), requires the measurement and
recognition of compensation expense for all stock-based awards made to employees
and directors, based on estimated fair values. We record stock-based
compensation expenses under SFAS 123(R) for awards of stock options, our
Employee Stock Purchase Plan (ESPP) and issuance of restricted and unrestricted
stock awards and units. The fair value of stock options and ESPP awards are
estimated at the date of grant using the Black-Scholes option-pricing model,
which includes assumptions for the dividend yield, expected volatility,
risk-free interest rate and expected life. For restricted and unrestricted
stock
awards and units, the fair value is the market close price of our common stock
on the date of grant. We expense stock-based compensation using the
straight-line method over the requisite service period. A substantial portion
of
our stock-based compensation can not be expensed for tax purposes. The benefits
of tax deductions in excess of the compensation cost recognized are classified
as financing cash inflows in the Condensed Consolidated Statements of Cash
Flows.
Use of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because of various factors affecting future costs and
operations, actual results could differ from estimates.
Reclassifications
As
a
result of the Actaris acquisition, certain prior year balances have been
reclassified to conform to the current year presentation. Such reclassifications
did not affect total revenues, operating income or net income.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS
157), which defines fair value, establishes a framework for measuring fair
value
and expands disclosures about fair value measurements. SFAS 157 is effective
for
fiscal years beginning after November 15, 2007, on a prospective basis. We
are
currently evaluating the impact of the adoption of SFAS 157 on our
financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (SFAS 159). This statement permits entities to choose to measure many
financial assets and liabilities at fair value. Unrealized gains and losses
on
items for which the fair value option has been elected would be reported in
net
income. SFAS 159 is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact of the adoption of SFAS 159 on
our
financial statements.
Note
2: Earnings Per Share and Capital Structure
The
following table sets forth the computation of basic and diluted
EPS:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands, except per share data)
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
(23,880 |
) |
|
$ |
10,204
|
|
|
$ |
(16,700 |
) |
|
$ |
17,273
|
Weighted
average number of shares outstanding
|
|
|
30,068
|
|
|
|
25,415
|
|
|
|
28,641
|
|
|
|
25,237
|
Basic
|
|
$ |
(0.79 |
) |
|
$ |
0.40
|
|
|
$ |
(0.58 |
) |
|
$ |
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
(23,880 |
) |
|
$ |
10,204
|
|
|
$ |
(16,700 |
) |
|
$ |
17,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
30,068
|
|
|
|
25,415
|
|
|
|
28,641
|
|
|
|
25,237
|
Dilutive
effect of stock-based awards
|
|
|
-
|
|
|
|
945
|
|
|
|
-
|
|
|
|
979
|
Adjusted
weighted average number of shares outstanding
|
|
|
30,068
|
|
|
|
26,360
|
|
|
|
28,641
|
|
|
|
26,216
|
Diluted
|
|
$ |
(0.79 |
) |
|
$ |
0.39
|
|
|
$ |
(0.58 |
) |
|
$ |
0.66
|
The
dilutive effect of stock-based awards is calculated using the treasury stock
method. Under this method, EPS is computed as if the awards were exercised
at
the beginning of the period (or at time of issuance, if later) and assumes
the
related proceeds were used to repurchase common stock at the average market
price during the period. Related proceeds include the amount the employee must
pay upon exercise, future compensation cost associated with the stock award
and
the amount of excess tax benefits. Weighted average common shares outstanding,
assuming dilution, include the incremental shares that would be issued upon
the
assumed exercise of stock-based awards. At June 30, 2007 and 2006, we had
stock-based awards outstanding of approximately 1.9 million and 1.8 million
at
weighted average option exercise prices of $34.83 and $22.99, respectively.
As a
result of our net loss, approximately 816,000 and 798,000 of stock-based awards
were excluded from the calculation of diluted earnings per share for three
and
six months ended June 30, 2007, respectively. Approximately 27,000 and 41,000
stock-based awards were excluded from the calculation of diluted EPS for the
three and six months ended June 30, 2006, respectively, because they were
anti-dilutive. These stock-based awards could be dilutive in future
periods.
In
August
2006, we issued $345 million of convertible senior subordinated notes
(convertible notes) that if converted in the future, would have a potentially
dilutive effect on our earnings per share. Under the indenture for the
convertible notes, upon conversion we are required to settle the principal
amount of the convertible notes in cash and may elect to settle the remaining
conversion obligation (stock price in excess of conversion price) in cash,
shares or a combination. The effect on diluted earnings per share is calculated
under the net share settlement method in accordance with the FASB’s Emerging
Issues Task Force 04-8, The Effect of Contingently Convertible Instruments
on Diluted Earnings per Share. Under the net share settlement method, we
include the amount of shares it would take to satisfy the conversion obligation,
assuming that all of the convertible notes are converted. The average closing
price of our common stock for each of the periods presented is used as the
basis
for determining the dilutive effect on EPS. The average price of our common
stock for the three and six months ended June 30, 2007 exceeded the conversion
price of $65.16 and, therefore, approximately 364,000 and 182,000 shares,
respectively, would have been dilutive if we had net income and included the
dilutive shares in the calculation of diluted earnings per share. These shares
could be dilutive in future periods.
On
March
1, 2007, we issued 4.1 million shares of common stock, no par value, for net
proceeds of $225.3 million, which were used to partially fund the
acquisition of Actaris on April 18, 2007.
We
have
authorized 10 million shares of preferred stock with no par value. In the event
of a liquidation, dissolution or winding up of the affairs of the corporation,
whether voluntary or involuntary, the holders of any outstanding stock will
be
entitled to be paid a preferential amount per share to be determined by the
Board of Directors prior to any payment to holders of common stock. Shares
of
preferred stock may be converted into common stock based on terms, conditions,
rates and subject to such adjustments as set by the Board of Directors. There
was no preferred stock issued or outstanding at June 30, 2007 and
2006.
Note
3: Certain Balance Sheet Components
Accounts receivable, net
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands)
|
Trade
(net of allowance for doubtful accounts of $5,679 and
$589)
|
|
$ |
316,478
|
|
|
$ |
100,162
|
Unbilled
revenue
|
|
|
9,492
|
|
|
|
9,762
|
Total
accounts receivable, net
|
|
$ |
325,970
|
|
|
$ |
109,924
|
A
summary
of the allowance for doubtful accounts activity is as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
615
|
|
|
$ |
379
|
|
|
$ |
589
|
|
|
$ |
598
|
|
Actaris
acquisition opening balance
|
|
|
4,891
|
|
|
|
-
|
|
|
|
4,891
|
|
|
|
-
|
|
Provision
(benefit) for doubtful accounts
|
|
|
300
|
|
|
|
92
|
|
|
|
386
|
|
|
|
(105 |
) |
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accounts
charged off
|
|
|
(127 |
) |
|
|
(2 |
) |
|
|
(187 |
) |
|
|
(24 |
) |
Ending
balance, June 30
|
|
$ |
5,679
|
|
|
$ |
469
|
|
|
$ |
5,679
|
|
|
$ |
469
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of the inventory balances is as follows:
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands)
|
Materials
|
|
$ |
85,805
|
|
|
$ |
29,650
|
Work
in process
|
|
|
16,421
|
|
|
|
5,220
|
Finished
goods
|
|
|
67,884
|
|
|
|
16,433
|
Total
manufacturing inventories
|
|
|
170,110
|
|
|
|
51,303
|
Service
inventories
|
|
|
1,031
|
|
|
|
1,193
|
Total
inventories
|
|
$ |
171,141
|
|
|
$ |
52,496
|
Property, plant and equipment, net
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands)
|
Machinery
and equipment
|
|
$ |
173,052
|
|
|
$ |
75,571
|
Computers
and purchased software
|
|
|
58,937
|
|
|
|
40,368
|
Buildings,
furniture and improvements
|
|
|
127,489
|
|
|
|
45,670
|
Land
|
|
|
39,443
|
|
|
|
2,482
|
Total
cost
|
|
|
398,921
|
|
|
|
164,091
|
Accumulated
depreciation
|
|
|
(88,967 |
) |
|
|
(75,402 |
Property,
plant and equipment, net
|
|
$ |
309,954
|
|
|
$ |
88,689
|
Depreciation
expense was $10.5 million and $3.8 million for the three months ended June
30,
2007 and 2006, respectively. Depreciation expense was $14.9 million and $7.4
million for the six months ended June 30, 2007 and 2006,
respectively.
Note
4: Business Combinations
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris)
for €800 million (approximately $1.1 billion) plus the retirement of $626.9
million of debt. The acquisition was financed with a $1.2 billion credit
facility (credit facility), $225 million in net proceeds from the sale of 4.1
million shares of common stock and cash on hand. The acquisition included all
of
Actaris’ electricity, gas and water meter manufacturing and sales operations,
located primarily outside of North America and provided geographic expansion
of
our business and product offerings. The
purchase price included a significant premium to the assets acquired and
liabilities assumed, due to expected synergies from products and markets of
the
combined entity, which resulted in a substantial amount of
goodwill.
The
preliminary purchase price, which includes estimated direct transaction costs
and net of cash acquired of $28.9 million, is summarized as follows (in
thousands):
Cash
consideration, net of cash acquired
|
|
$ |
1,698,107
|
Direct
transaction costs
|
|
|
18,641
|
Total
purchase price
|
|
$ |
1,716,748
|
We
have
made preliminary allocations of the purchase price to the assets acquired and
liabilities assumed based on estimated fair value assessments; however, we
are
still completing those assessments, including an analysis of the
discounted cash flows. Once we finalize the fair values, we may have changes
in
the following areas: tangible and intangible assets, goodwill, commitments
and
contingencies, deferred taxes and restructuring activities. The following
information reflects our preliminary allocation of the purchase
price.
|
|
April
18, 2007
|
|
|
|
|
|
Fair
Value
|
|
|
Useful
Life
|
|
|
(in
thousands)
|
|
|
(in
years)
|
Fair
value of tangible assets acquired and liabilities assumed,
net
|
|
$ |
4,837
|
|
|
|
In-process
research and development
|
|
|
35,551
|
|
|
|
Identified
intangible assets - amortizable
|
|
|
|
|
|
|
Core-developed
technology
|
|
|
213,424
|
|
|
|
10
|
Customer
relationships
|
|
|
201,744
|
|
|
|
10
|
Trademarks
and tradenames
|
|
|
124,921
|
|
|
|
10
|
Other
|
|
|
7,018
|
|
|
|
1
|
Goodwill
|
|
|
1,129,253
|
|
|
|
|
Total
net assets acquired
|
|
$ |
1,716,748
|
|
|
|
|
Significant
tangible assets acquired consisted of accounts receivable, inventory and
property, plant and equipment. Significant liabilities assumed consisted
of
accounts payable, accrued expenses, wages and benefits payable, deferred
taxes
and pension benefit obligations.
Our
acquisition of Actaris resulted in $35.6 million of IPR&D expense,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended
to
make key enhancements and improve functionality of our residential and
commercial and industrial meters. We value IPR&D using the income approach,
which uses the present value of the projected cash flows that are expected
to be
generated. The risk adjusted discount rate was 12 percent, which was based
on an
industry composite of weighted average cost of capital, with certain premiums
for equity risk and size, and the uncertainty associated with the completion
of
the development effort and subsequent commercialization.
The
preliminary values assigned to the identified intangible assets were estimated
using the income approach. Under the income approach, the fair value reflects
the present value of the projected cash flows that are expected to be generated.
The intangible assets will be amortized using the estimated discounted cash
flows assumed in the valuation models.
The
balance of the purchase price, after fair value allocations to all identified
assets and liabilities, represents goodwill. For tax purposes, goodwill is
not
deductible, as we acquired the stock of Actaris.
The
following pro forma results are based on the individual historical results
of
Itron, Inc. and Actaris (prior to the acquisition on April 18, 2007) with
adjustments to give effect to the combined operations as if the acquisition
had
been consummated on January 1, 2006. The significant adjustments were as
follows:
o
|
Increased
amortization expense related to the acquired identified intangible
assets
of $16.0 million and $32.0 million for the three and six months ended
June 30, 2006 and $3.9 million and $24.2 million for the three and
six
months ended June 30, 2007.
|
o
|
Additional
net interest expense of $11.9 million and $21.9 million for the three
and
six months ended June 30, 2006 and $1.8 million and $10.1 million
for the
three and six months ended June 30, 2007, related to the borrowings
incurred upon acquisition, net of the retirement of Actaris’ previous
debt.
|
o
|
Adjustment
to revise the income tax provision utilizing Itron’s estimated statutory
rate of 31%.
|
The
pro
forma results are intended for information purposes only and do not purport
to
represent what the combined companies’ results of operations or financial
position would actually have been had the transaction in fact occurred at an
earlier date or project the results for any future date or period.
|
|
Pro
Forma
|
|
|
Pro
Forma
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands, except per share data)
|
Revenues
|
|
$ |
432,756
|
|
|
$ |
411,666
|
|
|
$ |
796,991
|
|
|
$ |
785,636
|
Net
income
|
|
$ |
(7,894 |
) |
|
$ |
4,240
|
|
|
$ |
(13,492 |
) |
|
$ |
5,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
|
(0.26 |
) |
|
|
0.14
|
|
|
|
(0.45 |
) |
|
|
0.18
|
Diluted
net income per share
|
|
|
(0.26 |
) |
|
|
0.14
|
|
|
|
(0.45 |
) |
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares assumed outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,068
|
|
|
|
29,502
|
|
|
|
29,973
|
|
|
|
29,324
|
Diluted
|
|
|
30,068
|
|
|
|
30,447
|
|
|
|
29,973
|
|
|
|
30,303
|
Note
5: Identified Intangible Assets
The
gross
carrying amount and accumulated amortization of our intangible assets, other
than goodwill, are as follows:
|
|
At
June 30, 2007
|
|
|
At
December 31, 2006
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Assets
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
(in
thousands)
|
Core-developed
technology
|
|
$ |
373,737
|
|
|
$ |
(95,395 |
) |
|
$ |
278,342
|
|
|
$ |
162,930
|
|
|
$ |
(77,783 |
) |
|
$ |
85,147
|
Patents
|
|
|
7,088
|
|
|
|
(5,244 |
) |
|
|
1,844
|
|
|
|
7,088
|
|
|
|
(5,059 |
) |
|
|
2,029
|
Capitalized
software
|
|
|
5,065
|
|
|
|
(5,065 |
) |
|
|
-
|
|
|
|
5,065
|
|
|
|
(5,065 |
) |
|
|
-
|
Distribution
and production rights
|
|
|
3,935
|
|
|
|
(3,452 |
) |
|
|
483
|
|
|
|
3,935
|
|
|
|
(3,384 |
) |
|
|
551
|
Customer
contracts and relationships
|
|
|
218,048
|
|
|
|
(12,821 |
) |
|
|
205,227
|
|
|
|
16,888
|
|
|
|
(7,931 |
) |
|
|
8,957
|
Trademarks
and tradenames
|
|
|
150,212
|
|
|
|
(17,088 |
) |
|
|
133,124
|
|
|
|
26,210
|
|
|
|
(12,022 |
) |
|
|
14,188
|
Other
|
|
|
16,988
|
|
|
|
(12,633 |
) |
|
|
4,355
|
|
|
|
9,752
|
|
|
|
(7,942 |
) |
|
|
1,810
|
Total
identified intangible assets
|
|
$ |
775,073
|
|
|
$ |
(151,698 |
) |
|
$ |
623,375
|
|
|
$ |
231,868
|
|
|
$ |
(119,186 |
) |
|
$ |
112,682
|
A
summary
of the identifiable intangible asset account activity is as
follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands)
|
Beginning
balance, intangible assets, gross
|
|
$ |
231,061
|
|
|
$ |
211,328
|
|
|
$ |
231,868
|
|
|
$ |
211,328
|
Intangible
assets acquired
|
|
|
547,107
|
|
|
|
9,630
|
|
|
|
547,107
|
|
|
|
9,630
|
Intangible
assets adjusted
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,220 |
) |
|
|
-
|
Effect
of change in exchange rates
|
|
|
(3,095 |
) |
|
|
163
|
|
|
|
(2,682 |
) |
|
|
163
|
Ending
balance, intangible assets, gross
|
|
$ |
775,073
|
|
|
$ |
221,121
|
|
|
$ |
775,073
|
|
|
$ |
221,121
|
Identified
intangible assets increased during the second quarter of 2007 as a result of
the
Actaris acquisition. Based on the final determination of fair values of
intangible assets acquired in the Flow Metrix, Inc. acquisition, which was
consummated in November 2006, adjustments to the intangible assets recorded
were
made during the first quarter of 2007. Identified intangible assets increased
during the second quarter of 2006 as a result of the Quantum Consulting, Inc.
(Quantum) and ELO Sistemas e Tecnologia Ltda. (ELO) acquisitions. Intangible
assets are recorded in the local currency of our foreign subsidiaries;
therefore, the carrying amount of intangible assets can also increase or
decrease, with a corresponding change in accumulated other comprehensive income
(loss), due to changes in foreign currency exchange rates for those intangible
assets owned by our foreign subsidiaries. Intangible asset amortization expense
was $25.2 million and $7.6 million for the three months ended June 30, 2007
and 2006, respectively. Intangible asset amortization expense was
$32.3 million and $14.9 million for the six months ended June 30, 2007 and
2006, respectively.
Estimated
future annual amortization expense is as follows:
Years
ending December 31,
|
|
Estimated
Annual Amortization
|
|
|
|
(in
thousands)
|
2007
(amount remaining at June 30, 2007)
|
|
$ |
51,298
|
2008
|
|
|
|
110,636
|
2009
|
|
|
|
100,936
|
2010
|
|
|
|
79,853
|
2011
|
|
|
|
69,499
|
Beyond
2011
|
|
|
211,153
|
|
Total
identified intangible assets, net
|
|
$ |
623,375
|
Note
6: Goodwill
The
following table reflects goodwill allocated to each operating segment during
the
six months ended June 30, 2007 and 2006, respectively.
|
|
Itron
North
America
|
|
|
Actaris
|
|
|
Total
Company
|
|
|
|
(in
thousands)
|
|
Goodwill
balance, January 1, 2006
|
|
$ |
116,032
|
|
|
$ |
-
|
|
|
$ |
116,032
|
|
Goodwill
acquired
|
|
|
2,934
|
|
|
|
-
|
|
|
|
2,934
|
|
Effect
of change in exchange rates
|
|
|
538
|
|
|
|
-
|
|
|
|
538
|
|
Goodwill
balance, June 30, 2006
|
|
$ |
119,504
|
|
|
$ |
-
|
|
|
$ |
119,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance, January 1, 2007
|
|
$ |
126,266
|
|
|
$ |
-
|
|
|
$ |
126,266
|
|
Goodwill
acquired
|
|
|
-
|
|
|
|
1,129,253
|
|
|
|
1,129,253
|
|
Goodwill
adjustments
|
|
|
987
|
|
|
|
-
|
|
|
|
987
|
|
Effect
of change in exchange rates
|
|
|
1,050
|
|
|
|
(8,762 |
) |
|
|
(7,712 |
) |
Goodwill
balance, June 30, 2007
|
|
$ |
128,303
|
|
|
$ |
1,120,491
|
|
|
$ |
1,248,794
|
|
Goodwill
increased during the second quarter of 2007 as a result of the Actaris
acquisition. Based on the final determination of fair values of intangible
assets acquired in the Flow Metrix, Inc. acquisition, which was consummated
in
November 2006, adjustments to goodwill were recorded during the first quarter
of
2007. Goodwill increased during the second quarter of 2006 as a result of the
Quantum and ELO acquisitions. Goodwill is recorded in the local currency of
our
foreign subsidiaries; therefore, goodwill balances may also increase or
decrease, with a corresponding change in accumulated other comprehensive income
(loss), due to changes in foreign currency exchange rates.
Note
7: Debt
The
components of our borrowings are as follows:
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands)
|
Credit
facility
|
|
|
|
|
|
USD
denominated term loan
|
|
$ |
603,587
|
|
|
$ |
-
|
EUR
denominated term loan
|
|
|
449,816
|
|
|
|
-
|
GBP
denominated term loan
|
|
|
99,810
|
|
|
|
-
|
Convertible
senior subordinated notes
|
|
|
345,000
|
|
|
|
345,000
|
Senior
subordinated notes
|
|
|
124,375
|
|
|
|
124,324
|
|
|
|
1,622,588
|
|
|
|
469,324
|
Current
portion of debt
|
|
|
(11,561 |
) |
|
|
-
|
Total
long-term debt
|
|
$ |
1,611,027
|
|
|
$ |
469,324
|
Credit Facility
The
Actaris acquisition was financed in part by a $1.2 billion credit facility.
The
credit facility is comprised of a $605.1 million first lien U.S. dollar
denominated term loan; a €335 million first lien euro denominated term
loan; a £50 million first lien pound sterling denominated term loan
(collectively the term loans); and a $115 million multicurrency revolving
line-of-credit (revolver), which was undrawn at close. Interest rates on the
credit facility are based on the respective borrowings; denominated
LIBOR rate (U.S. dollar, euro or pound sterling) or the Wells Fargo Bank,
National Association’s prime rate, plus an additional margin subject to factors
including our consolidated leverage ratio. Scheduled amortization of principal
payments is 1% per year (0.25% quarterly) with an excess cash flow provision
for
additional annual principal repayment requirements. Maturities of the term
loans
and multicurrency revolver are seven years and six years, respectively, from
the
date of issuance with certain acceleration features relating to our current
outstanding subordinated notes. At June 30, 2007, there were no borrowings
outstanding under the revolver and $46.0 million was utilized by outstanding
standby letters of credit resulting in $69.0 million being available for
additional borrowings.
This
credit facility replaced an original $185 million seven-year senior secured
credit facility we entered into in 2004. We repaid $24.7 million remaining
on
our 2004 senior secured term loan during the first quarter of 2006.
Senior Subordinated Notes
Our
senior subordinated notes (subordinated notes) consist of $125 million aggregate
principal amount of 7.75% notes, issued in May 2004 and due in 2012. The
subordinated notes were discounted to a price of 99.265 to yield 7.875%. The
discount on the subordinated notes is accreted resulting in a balance of $124.4
million at June 30, 2007. The subordinated notes are registered with the SEC
and
are generally transferable. Prepaid debt fees are amortized over the life of
the
notes using the effective interest method. Fixed interest payments of
$4.8 million are required every six months, in May and November. The notes
are subordinated to our senior secured borrowings and are guaranteed by all
of
our domestic operating subsidiaries. The subordinated notes contain covenants,
which place restrictions on the incurrence of debt, the payment of dividends,
certain investments and mergers. The Actaris acquisition and the associated
financing were not prohibited under these covenants. We were in compliance
with
these debt covenants at June 30, 2007. Some or all of the subordinated notes
may
be redeemed at our option at any time on or after May 15, 2008, at their
principal amount plus a specified premium. At any time after May 15, 2008,
we
may, at our option, redeem the subordinated notes at a redemption price of
103.875%, decreasing each year thereafter.
Convertible Senior Subordinated Notes
On
August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC
and
are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in Emerging Issues Task Force (EITF)
05-02, The Meaning of “Conventional Convertible Debt Instruments” in Issue
00-19, as the number of shares, or cash, to be received by the holders was
not fixed at the inception of the obligation. We have concluded that the
conversion feature of our convertible notes does not require bifurcation from
the host contract in accordance with SFAS 133, as the conversion feature is
indexed to the Company’s own stock and would be classified within stockholders’
equity if it were a freestanding instrument as provided by EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.
The
convertible notes may be converted under the following circumstances, at the
option of the holder, at an initial conversion rate of 15.3478 shares of our
common stock for each $1,000 principal amount of the convertible notes
(conversion price of $65.16 per share), as defined in the
indenture:
o
|
during
any fiscal quarter commencing after September 30, 2006, if the closing
sale price per share of our common stock exceeds 120% of the conversion
price ($78.19) for at least 20 trading days in the 30 consecutive
trading
day period ending on the last trading day of the preceding fiscal
quarter;
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
o
|
during
the five business days after any five consecutive trading day period
in
which the trading price of the convertible notes for each day was
less
than 98% of the conversion value of the convertible
notes;
|
o
|
if
the convertible notes are called for
redemption;
|
o
|
if
a fundamental change occurs; or
|
o
|
upon
the occurrence of defined corporate
events.
|
The
convertible notes also contain put options, which may require us, at the
option of the holder, to repurchase all or a portion of the convertible notes
on
August 1, 2011, August 1, 2016 and August 1, 2021 at the principal amount,
plus
accrued and unpaid interest.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination.
The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our foreign subsidiaries, all of which are wholly owned. The convertible
notes contain covenants, which place restrictions on the incurrence of debt
and
certain mergers. The Actaris acquisition and the associated financing were
not
prohibited under these covenants. We were in compliance with these debt
covenants at June 30, 2007. The aggregate principal amount of the convertible
notes is included in long-term debt as they can not be converted prior to July
2011, unless certain defined events occur. At such time the holders have the
ability to convert, we will reclassify the convertible notes from long-term
to
current to reflect the holders’ conversion rights.
Prepaid Debt Fees & Interest Expense
Prepaid
debt fees for our outstanding borrowings are amortized over the respective
terms
using the effective interest method. Total unamortized prepaid debt fees were
approximately $32.2 million and $13.2 million at June 30, 2007 and
December 31, 2006, respectively. Accrued interest expense was $19.3 million
and $4.8 million at June 30, 2007 and December 31, 2006,
respectively.
Note
8: Pension Benefits
With
the
acquisition of Actaris, we now sponsor both funded and unfunded non-U.S. defined
benefit pension plans offering death and disability, retirement and special
termination benefits to employees in Germany, France, Spain, Italy, Belgium,
Chile, Portugal, Hungary and Indonesia. The defined benefit obligation is
calculated annually by using the projected unit credit method and is updated
quarterly. The measurement date for the pension plans was April 18, 2007, the
date of acquisition.
Our
general funding policy for these qualified pension plans is to contribute
amounts at least sufficient to satisfy regulatory funding standards of the
respective countries for each plan. Assuming that actual plan asset returns
are consistent with our expected rate of return in 2007 and beyond, and that
interest rates remain constant, we expect to contribute approximately $75,000
in
the second half of 2007 to our defined benefit pension
plans.
The
following table rolls forward the benefit obligation and plan assets and
summarizes the funded status of the defined benefit plans and amounts recognized
in the Condensed Consolidated Balance Sheet at June 30, 2007.
|
|
Period
ended
|
|
|
|
June
30, 2007
|
|
|
|
(in
thousands)
|
|
Change
in benefit obligation:
|
|
|
|
Benefit
obligation at beginning of period (April 18, 2007)
|
|
$ |
71,452
|
|
Service
cost
|
|
|
408
|
|
Interest
cost
|
|
|
644
|
|
Settlements
and curtailments
|
|
|
(93 |
) |
Benefits
paid
|
|
|
(892 |
) |
Other
– foreign exchange rate changes
|
|
|
(436 |
) |
Benefit
obligation at end of period
|
|
|
71,083
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
Fair
value of plan assets at beginning of period (April 18,
2007)
|
|
|
6,420
|
|
Actual
return of plan assets
|
|
|
47
|
|
Company
contributions
|
|
|
21
|
|
Benefits
paid
|
|
|
(38 |
) |
Other
– foreign exchange rate changes
|
|
|
(37 |
) |
Fair
value of plan assets at end of period
|
|
|
6,413
|
|
Ending
balance at fair value
|
|
$ |
64,670
|
|
Amounts
recognized on the Condensed Consolidated Balance Sheet consist of:
|
|
Period
ended
|
|
|
|
June
30, 2007
|
|
|
|
(in
thousands)
|
|
Current
portion of pension plan liability in wages and benefits
payable
|
|
$ |
1,030
|
|
Long-term
portion of pension plan liability
|
|
|
64,010
|
|
Plan
assets in other long term assets
|
|
|
(370 |
) |
Net
amount recognized
|
|
$ |
64,670
|
|
The
accumulated benefit obligation for our defined benefit pension plans was $66.6
million at June 30, 2007.
Net
periodic pension benefit costs for our plans include the following
components:
|
|
Period
ended
|
|
|
|
June
30, 2007
|
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$ |
408
|
|
Interest
cost
|
|
|
644
|
|
Expected
return on plan assets
|
|
|
(47 |
) |
Settlements
and curtailments
|
|
|
(93 |
) |
Net
periodic benefit cost
|
|
$ |
912
|
|
The
significant actuarial weighted average assumptions used in determining the
benefit obligations and net periodic benefit cost for our benefit plans are
as
follows:
|
|
Period
ended
|
|
|
June
30, 2007
|
Actuarial
assumptions used to determine benefit obligations at end of
period:
|
|
|
Discount
rate
|
4.99%
|
|
Expected
annual rate of compensation increase
|
2.94%
|
Actuarial
assumptions used to determine net periodic benefit cost for the
period:
|
|
|
Discount
rate
|
4.99%
|
|
Expected
rate of return on plan assets
|
3.76%
|
|
Expected
annual rate of compensation increase
|
2.94%
|
We
determine a discount rate for each individual defined benefit pension plan
based
on the estimated duration of each plan’s liabilities. For our euro denominated
defined benefit pension plans, we match the plans’ expected future benefit
payments against the Merrill Lynch Euro Corp. yield curve. Discount rates for
our defined benefit pension plans denominated in another currencies are selected
using a similar methodology applied on high quality corporate bond yield data
labeled in that currency.
Our
expected rate of return on plan assets is derived from a study of actual
historic returns achieved and anticipated future long-term performance of plan
assets. While the study gives consideration to recent trust performance and
historical returns, the assumption represents a long-term prospective
return.
Pension
plans with accumulated benefit obligations exceeding the fair value of plan
assets were as follows:
|
|
Period
ended
|
|
|
June
30, 2007
|
|
|
(in
thousands)
|
Projected
benefit obligation
|
|
$ |
69,637
|
Accumulated
benefit obligation
|
|
$ |
65,355
|
Fair
value of plan assets
|
|
$ |
4,597
|
The
target allocation for our pension plans assets is as follows:
|
Period
ended
|
|
June
30, 2007
|
Asset
category:
|
|
Short-term
investments and cash
|
7%
|
Insurance
funds
|
93%
|
Our
asset
investment strategy focuses on maintaining a portfolio using primarily insurance
funds, which are accounted for as investments and measured at fair value, in
order to achieve our long-term investment objectives on a risk adjusted basis.
Our actual invested positions in various securities change over time based
on
short and longer-term investment opportunities. Strategic pension plan asset
allocations are determined by the objective to achieve an investment return,
which together with the contributions paid, is sufficient to maintain reasonable
control over the various funding risks of the plans. Based upon current market
and economic environments, the actual asset allocation may periodically be
permitted to deviate from policy targets.
Annual
benefit payments, including amounts to be paid from Company assets for unfunded
plans, and reflecting expected future service, as appropriate, are expected
to
be paid as follows:
Year
Ending December 31, |
|
Estimated
Annual Benefit Payments
|
|
|
(in
thousands)
|
2007
(amount remaining at June 30, 2007)
|
|
$ |
1,700
|
2008
|
|
|
3,183
|
2009
|
|
|
3,393
|
2010
|
|
|
3,939
|
2011
|
|
|
4,059
|
2012
- 2016
|
|
|
20,657
|
Note
9: Income Taxes
Our
actual income tax rates typically differ from the federal statutory rate of
35%,
and can vary from period to period, due to fluctuations in operating results,
new or revised tax legislation and accounting pronouncements, changes in the
level of business performed in domestic and international jurisdictions,
research credits and state income taxes. We estimate that our 2007 actual income
tax rate will be approximately 38%.
At
June
30, 2006, our estimated annual effective income tax rate was 42%, resulting
in
an actual income tax rate of 33% and 39% for the three and six months ended
June 30, 2006. At June 30, 2006, our effective tax rate did not include a
federal research credit, as the credit had expired. In December 2006, the Tax
Relief and Health Care Act was signed into law, extending the research tax
credit for qualified research expenses incurred throughout 2006 and 2007. This
legislation reduced our estimated 2007 annual effective tax rate as compared
with the estimated 2006 annual effective tax rate at June 30, 2006.
Effective
January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). Although our implementation
of FIN 48 did not require a cumulative effect adjustment to retained earnings,
we recorded $6.1 million of deferred tax assets and noncurrent liabilities
to conform to the balance sheet presentation requirements of FIN 48 on
January 1, 2007. As of June 30 2007, the amount of unrecognized tax benefits
was
$35.9 million of which approximately $29.3 million was acquired as part of
the
Actaris acquisition on April 18, 2007. We do not expect any reasonably possible
material changes to the estimated amount of liabilities associated with our
unrecognized tax benefits through June 30, 2008. The amount of unrecognized
tax
benefits that would affect our actual tax rate as of January 1, 2007 and June
30, 2007 was $6.1 million and $6.9 million, respectively.
We
are
subject to income tax in the U.S. federal jurisdiction and numerous state
jurisdictions. The Internal Revenues Service (IRS) has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Tax years subsequent to 1995 remain open to examination by the major
tax
jurisdictions to which we are subject. We classify interest and penalties
related to unrecognized tax benefits in our provision for income taxes. Accrued
interest and penalties were $9,000 and $7.4 million at January 1, 2007 and
June
30, 2007, respectively. The increase from January 1, 2007 to June 30, 2007
was
the result of the Actaris acquisition on April 18, 2007.
Note
10: Stock-Based Compensation
We
record
stock-based compensation expense under SFAS 123(R) for awards of stock options,
our Employee Stock Purchase Plan (ESPP) and issuance of restricted and
unrestricted stock awards and units. We expense stock-based compensation using
the straight-line method over the requisite service period. For the three months
ended June 30, 2007 and 2006, stock-based compensation expense was
$3.0 million and $2.0 million, before a related income tax benefit of
$714,000 and $277,000, respectively. For the six months ended June 30, 2007
and
2006, stock-based compensation expense was $5.9 million and
$4.1 million, before a related income tax benefit of $1.4 million and
$549,000, respectively.
The
fair
value of stock options and ESPP awards issued during the three and six months
ended June 30, 2007 and 2006 were estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
|
Employee
Stock Options
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Dividend
yield
|
-
|
|
-
|
|
-
|
|
-
|
Expected
volatility
|
38.1%
|
|
41.6%
|
|
38.4%
|
|
41.6%
|
Risk-free
interest rate
|
4.6%
|
|
4.9%
|
|
4.6%
|
|
4.9%
|
Expected
life (years)
|
4.94
|
|
4.37
|
|
4.94
|
|
4.37
|
|
|
|
|
|
|
|
|
|
ESPP
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Dividend
yield
|
-
|
|
-
|
|
-
|
|
-
|
Expected
volatility
|
24.3%
|
|
54.0%
|
|
24.3%
|
|
48.2%
|
Risk-free
interest rate
|
5.0%
|
|
4.7%
|
|
5.1%
|
|
4.4%
|
Expected
life (years)
|
0.25
|
|
0.25
|
|
0.25
|
|
0.25
|
Expected
price volatility is based on a combination of historical volatility of our
common stock and the implied volatility of our traded options, for the related
vesting period. We believe this combined approach is more reflective of current
and historical market conditions and a better indicator of expected volatility.
The risk-free interest rate is the rate available as of the award date on
zero-coupon U.S. government issues with a remaining term equal to the expected
life of the award. The expected life is the weighted average expected life
for
the entire award based on the fixed period of time between the date the award
is
granted and the date the award is fully exercised. Factors considered in
estimating the expected life are historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations
of
future employee behavior. We have not paid dividends in the past and do not
plan
to pay any dividends in the foreseeable future.
Subject
to stock splits, dividends and other similar events, 5,875,000 shares of common
stock are reserved and authorized for issuance under our Amended and Restated
2000 Stock Incentive Plan, of which 988,552 shares remain available for issuance
at June 30, 2007. In addition, of the authorized shares under the plan, no
more
than 1.0 million shares can be issued as non-stock options (awards). Awards
consist of restricted stock units, restricted stock awards and the Board of
Directors’ unrestricted stock awards. Shares remaining for issuance as awards
were 825,802 at June 30, 2007.
Stock
Option Plans
Stock
options to purchase the Company’s common stock are granted with an exercise
price equal to the fair market value of the stock on the date of grant upon
approval by our Board of Directors. Options generally become exercisable in
three or four equal installments beginning a year from the date of grant and
generally expire 10 years from the date of grant.
The
fair
value of each stock option granted is estimated on the date of grant using
the
Black-Scholes option-pricing model. For the three and six months ended June
30,
2007, we issued 180,000 and 200,000 shares with weighted average fair values
of
$27.26 and $27.21, respectively. For the three months ended June 30, 2006,
we
issued 30,000 shares with a weighted average fair value of $25.82. No stock
options were granted during the three month period ended March 31, 2006.
Compensation expense related to stock options recognized under SFAS 123(R)
for
the three months ended June 30, 2007 and 2006 was $2.4 million and
$1.8 million, respectively and $4.8 million and $3.6 million for the
six months ended June 30, 2007 and 2006, respectively. Compensation expense
is
recognized only for those options expected to vest, with forfeitures estimated
at the date of grant based on our historical experience and future
expectations.
A
summary
of our stock option activity for the six months ended June 30, 2007 and 2006
is
as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
|
(in
thousands)
|
|
|
|
|
|
(years)
|
|
|
(in
thousands)
|
Outstanding,
January 1, 2006
|
|
|
2,443
|
|
|
$ |
21.24
|
|
|
|
6.89
|
|
|
$ |
46,189
|
Granted
|
|
|
30
|
|
|
|
63.56
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(591 |
) |
|
|
17.12
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(46 |
) |
|
|
32.04
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2006
|
|
|
1,836
|
|
|
$ |
22.99
|
|
|
|
7.25
|
|
|
$ |
66,741
|
Exercisable
and expected to vest, June 30, 2006
|
|
|
1,747
|
|
|
$ |
22.48
|
|
|
|
7.21
|
|
|
$ |
64,375
|
Exercisable,
June 30, 2006
|
|
|
964
|
|
|
$ |
17.26
|
|
|
|
6.25
|
|
|
$ |
40,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2007
|
|
|
2,225
|
|
|
$ |
29.78
|
|
|
|
7.46
|
|
|
$ |
49,469
|
Granted
|
|
|
200
|
|
|
|
66.94
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(441 |
) |
|
|
22.87
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(45 |
) |
|
|
43.96
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(7 |
) |
|
|
42.62
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2007
|
|
|
1,932
|
|
|
$ |
34.83
|
|
|
|
7.38
|
|
|
$ |
83,264
|
Exercisable
and expected to vest, June 30, 2007
|
|
|
1,724
|
|
|
$ |
33.23
|
|
|
|
7.20
|
|
|
$ |
77,069
|
Exercisable,
June 30, 2007
|
|
|
903
|
|
|
$ |
19.92
|
|
|
|
5.72
|
|
|
$ |
52,421
|
The
aggregate intrinsic value in the table above is before applicable income taxes,
based on our closing stock price as of the last business day of the period,
which represents amounts that would have been received by the optionees had
all
options been exercised on that date. As of June 30, 2007, total unrecognized
stock-based compensation expense related to nonvested stock options, net of
estimated forfeitures, was approximately $13.1 million, which is expected to
be
recognized over a weighted average period of approximately 24
months.
Restricted
Stock Units
During
2007, we issued restricted stock units (RSUs) with a cliff vesting period
of
three years from the anniversary of the grant date as set forth in the award
agreements. Upon vesting, the RSUs are converted into shares of the Company’s
stock on a one-for-one basis and issued to employees, subject to any deferral
elections made by a recipient or required by the plan. Restricted stock is
reserved in the recipients’ name at the grant date and issued upon vesting. The
Company is entitled to an income tax deduction in an amount equal to the
taxable
income reported by the holder upon vesting of the award.
Total
compensation expense relating to RSUs and restricted stock was $125,000 for
the
three months ended June 30, 2007 as the first grant date was May 14, 2007.
Unrecognized compensation cost in connection with these awards, net of estimated
forfeitures, totaled $2.8 million at June 30, 2007. The cost is expected to
be recognized over three years. Grants of RSUs were 60,667 for the three
months ended June 30, 2007. There were no RSUs that were forfeited and returned
to the plan at June 30, 2007.
Long-Term
Performance Plan
We
have a
Long-Term Performance Plan (LTPP) for senior management, payments of which
are
contingent on the attainment of yearly goals payable in the Company’s common
stock with a three-year cliff vesting period. Restricted stock units will be
used for the 2007 plan. Restricted stock awards were used for the 2006 and
2005
plans.
Restricted
stock units that are attainable are established at the beginning of the
performance period based on a percentage of the participant’s base salary and
the fair market value of the Company’s common stock on the first business day of
the performance period. The maximum restricted stock units attainable at the
beginning of the year for the 2007 performance period consisted of 57,523
restricted stock units at a grant-date fair value of $62.52.
The
2006
and 2005 restricted stock awards were granted in the year following attainment,
as approved by our Board of Directors, with the value of the award based on
a
percentage of the participant’s base salary and the performance objectives for
the period. The
restricted stock award for 2005 consisted of 30,542 shares of restricted stock
issued on February 15, 2006, at a grant-date fair value of $59.16. The
restricted stock award for 2006 consisted of 25,065 shares of restricted stock
issued on February 23, 2007, at a grant-date fair value of $62.90.
Under
each of the plans, compensation expense is recognized only for those awards
expected to vest, with forfeitures estimated based on our historical experience
and future expectations. Total compensation expense recognized for the LTPP
plan
was $381,000 and $137,000 for the three months ended June 30, 2007 and 2006,
respectively. Total compensation expense recognized for the LTPP plan was
$658,000 and $174,000 for the six months ended June 30, 2007 and 2006,
respectively.
Board of Directors’ Unrestricted Stock Awards
We
issue
unrestricted stock awards to our Board of Directors as part of the Board of
Directors’ compensation. During the three months ended June 30, 2007 and 2006,
we issued 300 and 420 shares of unrestricted stock to our Board of Directors,
with a weighted average grant-date fair value of $66.41 and $70.99,
respectively. The expense related to these awards for the three months ended
June 30, 2007 and 2006 was $20,000 and $30,000, respectively. During the six
months ended June 30, 2007 and 2006, we issued 3,210 and 3,396 shares of
unrestricted stock to our Board of Directors, with a weighted average grant-date
fair value of $52.78 and $44.09, respectively. The expense related to these
awards for the six months ended June 30, 2007 and 2006 was $170,000 and
$150,000, respectively. All awards were fully vested and expensed when
granted.
Employee Stock Purchase Plan
Eligible
employees who have completed three months of service, work more than 20 hours
each week and are employed more than five months in any calendar year are
eligible to participate in our employee stock purchase plan. Employees who
own
5% or more of our common stock are not eligible to participate in the ESPP.
Under the terms of the ESPP, eligible employees can choose payroll deductions
each year of up to 10% of their regular cash compensation. Such deductions
are
applied toward the discounted purchase price of our common stock. The purchase
price of the common stock is 85% of the fair market value of the stock at the
end of each fiscal quarter. Under the ESPP, we sold 23,320 and 27,666 shares
to
employees in the six months ended June 30, 2007 and 2006, respectively. The
fair
value of ESPP awards issued is estimated using the Black-Scholes option-pricing
model. The weighted average fair value of the ESPP awards issued in the six
months ended June 30, 2007 and 2006 was $8.99 and $8.17, respectively. The
expense related to ESPP recognized under SFAS 123(R) for the three months ended
June 30, 2007 and 2006 was $97,000 and $112,000, respectively. The expense
related to ESPP recognized under SFAS 123(R) for the six months ended June
30,
2007 and 2006 was $192,000, in both periods. We had no unrecognized compensation
cost at June 30, 2007 associated with the awards issued under the
ESPP.
Note
11: Commitments and Contingencies
Guarantees
and Indemnifications
Under
FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we
record a liability for certain types of guarantees and indemnifications for
agreements entered into or amended subsequent to December 31, 2002. We had
no such guarantees or indemnifications as of June 30, 2007 and December 31,
2006.
We
maintain bid and performance bonds for certain customers. Bonds in force were
$23.8 million and $6.0 million at June 30, 2007 and December 31, 2006,
respectively (the increase in bid bonds was the result of the Actaris
acquisition.) Bid bonds guarantee that we will enter into a contract consistent
with the terms of the bid. Performance bonds provide a guarantee to the customer
for future performance, which usually covers the installation phase of a
contract and may on occasion cover the operations and maintenance phase of
outsourcing contracts. We also have standby letters of credit to guarantee
our
performance under certain contracts. In addition to the outstanding standby
letters of credit under our credit facility, our Actaris operating segment
has
unsecured revolving lines of credit totaling €7.2 million, £1.0 million and $6.4
million, denominated in euros, pound sterling and U.S. dollars, respectively,
with total outstanding standby letters of credit of $1.9 million at June 30,
2007. The total outstanding amounts of standby letters of credit were
$47.9 million and $23.0 million at June 30, 2007 and December 31, 2006,
respectively.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments.
We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Legal
Matters
We
are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood
of
any adverse judgments or outcomes related to legal matters, as well as ranges
of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue
in
accordance with SFAS 5, Accounting for Contingencies (SFAS 5), and
related pronouncements. In accordance with SFAS 5, a liability is recorded
when
we determine that a loss is probable and the amount can be reasonably estimated.
Additionally, we disclose contingencies for which a material loss is reasonably
possible, but not probable. Legal contingencies at June 30, 2007 and December
31, 2006 were not material to our financial condition and results of
operations.
Note
12: Segment Information
At
December 31, 2006, we reported three operating segments reflecting our major
product lines. With the Actaris acquisition on April 18, 2007, we aligned our
operating segments into two groups, Itron North America and Actaris, to reflect
the way we are now managing the business. Our Itron North America operating
segment represents our operations prior to the Actaris acquisition, and are
primarily located in North America. Our Actaris operating segment represents
the
operations of the Actaris acquisition, which are primarily located outside
of
North America. We have three measures of segment performance: revenue, gross
profit (margin) and operating income. There were no intersegment
revenues.
Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Assets
and liabilities are not used in our measurement of segment performance and,
therefore, are not allocated to our segments. Approximately 99% of
depreciation expense was allocated to our segments at June 30, 2007 and 2006,
with the remaining portion reported under corporate unallocated.
Revenues
by region were as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands)
|
Revenues
by region
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$ |
186,996
|
|
|
$ |
1,405
|
|
|
$ |
188,450
|
|
|
$ |
2,010
|
United
States and Canada
|
|
|
148,437
|
|
|
|
154,610
|
|
|
|
284,895
|
|
|
|
304,963
|
Other
|
|
|
66,126
|
|
|
|
7,795
|
|
|
|
76,125
|
|
|
|
12,390
|
Total
revenues
|
|
$ |
401,559
|
|
|
$ |
163,810
|
|
|
$ |
549,470
|
|
|
$ |
319,363
|
Segment
Products
Itron
North America
|
Electricity
meters with and without automated meter reading (AMR); gas and water
AMR
modules; handheld, mobile and network AMR data collection technologies;
advanced metering infrastructure (AMI) technologies; software,
installation, implementation, maintenance support and other
services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water
and
heat meters and diaphragms; turbine and rotary gas meters; one-way
and
two-way electricity prepayment systems, including smart key, keypad
and
smart card; two-way gas prepayment systems using smart card; AMR
data
collection technologies; installation, implementation, maintenance
support
and other services.
|
Segment
Information
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
151,912
|
|
|
$ |
163,810
|
|
|
$ |
299,823
|
|
|
$ |
319,363
|
|
Actaris
|
|
|
249,647
|
|
|
|
-
|
|
|
|
249,647
|
|
|
|
-
|
|
Total
Company
|
|
$ |
401,559
|
|
|
$ |
163,810
|
|
|
$ |
549,470
|
|
|
$ |
319,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
63,366
|
|
|
$ |
69,032
|
|
|
$ |
124,691
|
|
|
$ |
135,806
|
|
Actaris
|
|
|
61,348
|
|
|
|
-
|
|
|
|
61,348
|
|
|
|
-
|
|
Total
Company
|
|
$ |
124,714
|
|
|
$ |
69,032
|
|
|
$ |
186,039
|
|
|
$ |
135,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
North America
|
|
$ |
16,130
|
|
|
$ |
23,884
|
|
|
$ |
32,896
|
|
|
$ |
50,094
|
|
Actaris
|
|
|
(31,650 |
) |
|
|
-
|
|
|
|
(31,650 |
) |
|
|
-
|
|
Corporate
unallocated
|
|
|
(7,841 |
) |
|
|
(6,224 |
) |
|
|
(15,307 |
) |
|
|
(13,446 |
) |
Total
Company
|
|
|
(23,361 |
) |
|
|
17,660
|
|
|
|
(14,061 |
) |
|
|
36,648
|
|
Total
other income (expense)
|
|
|
(15,278 |
) |
|
|
(2,466 |
) |
|
|
(13,178 |
) |
|
|
(8,298 |
) |
Income
(loss) before income taxes
|
|
$ |
(38,639 |
) |
|
$ |
15,194
|
|
|
$ |
(27,239 |
) |
|
$ |
28,350
|
|
No
single
customer represented more than 10% of total Company revenues for the three
and
six months ended June 30, 2007. No single customer represented more than 10%
of
the Itron North America operating segment revenues for the three and six months
ended June 30, 2007. No single customer represented more than 10% of the Actaris
operating segment revenues from April 18, 2007 to June 30, 2007.
One
customer, Progress Energy, accounted for 19% and 21% of total Company and Itron
North America segment revenues for the three and six months ended June 30,
2006,
respectively.
Note
13: Other Comprehensive Income (Loss)
Other
comprehensive income (loss) is reflected as an increase (decrease) to
shareholders’ equity and is not reflected in our results of operations. Other
comprehensive income (loss) during the period, net of tax, was as
follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
(in
thousands)
|
Net
income (loss)
|
|
$ |
(23,880 |
) |
|
$ |
10,204
|
|
|
$ |
(16,700 |
) |
|
$ |
17,273
|
Change
in foreign currency translation adjustments, net of tax
|
|
|
(6,542 |
) |
|
|
791
|
|
|
|
(6,310 |
) |
|
|
681
|
Total
other comprehensive income (loss)
|
|
$ |
(30,422 |
) |
|
$ |
10,995
|
|
|
$ |
(23,010 |
) |
|
$ |
17,954
|
Accumulated
other comprehensive income (loss), net of tax, was approximately ($4.7) million
and $1.6 million at June 30, 2007 and December 31, 2006, respectively, and
consisted of the adjustments for foreign currency translation as indicated
above.
Note
14: Consolidating Financial Information
The
credit facility, senior subordinated notes and convertible notes were issued
by
Itron, Inc. and are guaranteed by all our operating subsidiaries, except
for our
foreign subsidiaries, all of which are wholly owned. The guarantees under
our
senior subordinated notes include all current and future U.S. legal entities
and
are joint and several, full, complete and unconditional. At the date of
issuance, our convertible notes were not guaranteed by any of our subsidiaries
at the date of issuance. However, any future subsidiaries that
guarantee our obligations under the senior subordinated notes will guarantee
our
convertible notes, joint and several, full, complete and unconditional. There
are currently no restrictions on the ability of the subsidiary guarantors
to
transfer funds to the parent company.
For
the
year ended December 31, 2006, our guarantor subsidiaries were considered
minor
as a result of legal entity mergers into the parent company during 2006,
eliminating the consolidating financial information disclosure in our Annual
Report on Form 10-K, as required by SEC Regulation S-X Rule 3-10, Financial
Statements of Guarantors and Issuers of Guaranteed Securities Registered
or
Being Registered, (Rule 3-10). On April 18, 2007, we acquired a legal
entity in the United States as part of the Actaris acquisition. As a result
of
this acquisition, our guarantor subsidiaries are no longer considered minor
and,
therefore, the following consolidating financial information has been prepared
and presented pursuant to Rule 3-10. We have allocated a portion of our credit
facility borrowings to this newly acquired entity, based on its relative
equity
as compared with the entire Actaris acquisition.
The
guarantor subsidiaries of our senior subordinated notes, which are not
guarantors of our convertible notes, consisted of three non-operating
subsidiaries of which we had equity in earnings (losses) of $300,000 and
($2.6 million)for the three and six months ended June 30, 2007 and ($40,000)
and
($43,000) for the three and six months ended June 30, 2006. Our
investment in these non-operating subsidiaries was $2.1 million and $531,000
at
June 30, 2007 and December 31, 2006, respectively.
Condensed
Consolidating Statement of Operations
|
Three
Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
139,992
|
|
|
$ |
14,535
|
|
|
$ |
257,291
|
|
|
$ |
(10,259 |
) |
|
$ |
401,559
|
|
Cost
of revenues
|
|
|
82,482
|
|
|
|
11,256
|
|
|
|
193,630
|
|
|
|
(10,523 |
) |
|
|
276,845
|
|
Gross
profit
|
|
|
57,510
|
|
|
|
3,279
|
|
|
|
63,661
|
|
|
|
264
|
|
|
|
124,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
13,393
|
|
|
|
1,449
|
|
|
|
19,551
|
|
|
|
-
|
|
|
|
34,393
|
|
Product
development
|
|
|
17,449
|
|
|
|
440
|
|
|
|
7,680
|
|
|
|
(48 |
) |
|
|
25,521
|
|
General
and administrative
|
|
|
13,595
|
|
|
|
808
|
|
|
|
12,984
|
|
|
|
-
|
|
|
|
27,387
|
|
Amortization
of intangible assets
|
|
|
6,655
|
|
|
|
-
|
|
|
|
18,568
|
|
|
|
-
|
|
|
|
25,223
|
|
In-process
research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
35,551
|
|
|
|
-
|
|
|
|
35,551
|
|
Total
operating expenses
|
|
|
51,092
|
|
|
|
2,697
|
|
|
|
94,334
|
|
|
|
(48 |
) |
|
|
148,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
6,418
|
|
|
|
582
|
|
|
|
(30,673 |
) |
|
|
312
|
|
|
|
(23,361 |
) |
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
25,336
|
|
|
|
44
|
|
|
|
999
|
|
|
|
(24,163 |
) |
|
|
2,216
|
|
Interest
expense
|
|
|
(21,314 |
) |
|
|
(2,246 |
) |
|
|
(23,525 |
) |
|
|
24,158
|
|
|
|
(22,927 |
) |
Other
income (expense), net
|
|
|
6,331
|
|
|
|
80
|
|
|
|
(978 |
) |
|
|
-
|
|
|
|
5,433
|
|
Total
other income (expense)
|
|
|
10,353
|
|
|
|
(2,122 |
) |
|
|
(23,504 |
) |
|
|
(5 |
) |
|
|
(15,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
16,771
|
|
|
|
(1,540 |
) |
|
|
(54,177 |
) |
|
|
307
|
|
|
|
(38,639 |
) |
Income
tax benefit (provision)
|
|
|
4,280
|
|
|
|
(131 |
) |
|
|
10,610
|
|
|
|
-
|
|
|
|
14,759
|
|
Equity
in earnings (losses) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
(43,872 |
) |
|
|
305
|
|
|
|
-
|
|
|
|
43,567
|
|
|
|
-
|
|
Net
loss
|
|
$ |
(22,821 |
) |
|
$ |
(1,366 |
) |
|
$ |
(43,567 |
) |
|
$ |
43,874
|
|
|
$ |
(23,880 |
) |
Condensed
Consolidating Statement of Operations
|
Three
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
158,077
|
|
|
$ |
15,189
|
|
|
$ |
(9,456 |
) |
|
$ |
163,810
|
|
Cost
of revenues
|
|
|
91,908
|
|
|
|
12,192
|
|
|
|
(9,322 |
) |
|
|
94,778
|
|
Gross
profit
|
|
|
66,169
|
|
|
|
2,997
|
|
|
|
(134 |
) |
|
|
69,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
14,773
|
|
|
|
1,548
|
|
|
|
-
|
|
|
|
16,321
|
|
Product
development
|
|
|
15,035
|
|
|
|
107
|
|
|
|
(222 |
) |
|
|
14,920
|
|
General
and administrative
|
|
|
11,646
|
|
|
|
750
|
|
|
|
123
|
|
|
|
12,519
|
|
Amortization
of intangible assets
|
|
|
7,404
|
|
|
|
208
|
|
|
|
-
|
|
|
|
7,612
|
|
Total
operating expenses
|
|
|
48,858
|
|
|
|
2,613
|
|
|
|
(99 |
) |
|
|
51,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
17,311
|
|
|
|
384
|
|
|
|
(35 |
) |
|
|
17,660
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
368
|
|
|
|
46
|
|
|
|
(54 |
) |
|
|
360
|
|
Interest
expense
|
|
|
(2,416 |
) |
|
|
(223 |
) |
|
|
54
|
|
|
|
(2,585 |
) |
Other
income (expense), net
|
|
|
(305 |
) |
|
|
29
|
|
|
|
35
|
|
|
|
(241 |
) |
Total
other income (expense)
|
|
|
(2,353 |
) |
|
|
(148 |
) |
|
|
35
|
|
|
|
(2,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
14,958
|
|
|
|
236
|
|
|
|
-
|
|
|
|
15,194
|
|
Income
tax (provision) benefit
|
|
|
(5,594 |
) |
|
|
604
|
|
|
|
-
|
|
|
|
(4,990 |
) |
Equity
in earnings of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
840
|
|
|
|
-
|
|
|
|
(840 |
) |
|
|
-
|
|
Net
income
|
|
$ |
10,204
|
|
|
$ |
840
|
|
|
$ |
(840 |
) |
|
$ |
10,204
|
|
Condensed
Consolidating Statement of Operations
|
Six
Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
281,339
|
|
|
$ |
14,535
|
|
|
$ |
274,969
|
|
|
$ |
(21,373 |
) |
|
$ |
549,470
|
|
Cost
of revenues
|
|
|
164,183
|
|
|
|
11,256
|
|
|
|
208,447
|
|
|
|
(20,455 |
) |
|
|
363,431
|
|
Gross
profit
|
|
|
117,156
|
|
|
|
3,279
|
|
|
|
66,522
|
|
|
|
(918 |
) |
|
|
186,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
25,712
|
|
|
|
1,449
|
|
|
|
22,152
|
|
|
|
-
|
|
|
|
49,313
|
|
Product
development
|
|
|
33,152
|
|
|
|
440
|
|
|
|
7,846
|
|
|
|
(96 |
) |
|
|
41,342
|
|
General
and administrative
|
|
|
26,935
|
|
|
|
808
|
|
|
|
13,888
|
|
|
|
-
|
|
|
|
41,631
|
|
Amortization
of intangible assets
|
|
|
13,264
|
|
|
|
-
|
|
|
|
18,999
|
|
|
|
-
|
|
|
|
32,263
|
|
In-process
research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
35,551
|
|
|
|
-
|
|
|
|
35,551
|
|
Total
operating expenses
|
|
|
99,063
|
|
|
|
2,697
|
|
|
|
98,436
|
|
|
|
(96 |
) |
|
|
200,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
18,093
|
|
|
|
582
|
|
|
|
(31,914 |
) |
|
|
(822 |
) |
|
|
(14,061 |
) |
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
31,632
|
|
|
|
44
|
|
|
|
1,036
|
|
|
|
(24,407 |
) |
|
|
8,305
|
|
Interest
expense
|
|
|
(26,711 |
) |
|
|
(2,246 |
) |
|
|
(23,883 |
) |
|
|
24,416
|
|
|
|
(28,424 |
) |
Other
income (expense), net
|
|
|
7,828
|
|
|
|
80
|
|
|
|
(967 |
) |
|
|
-
|
|
|
|
6,941
|
|
Total
other income (expense)
|
|
|
12,749
|
|
|
|
(2,122 |
) |
|
|
(23,814 |
) |
|
|
9
|
|
|
|
(13,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
30,842
|
|
|
|
(1,540 |
) |
|
|
(55,728 |
) |
|
|
(813 |
) |
|
|
(27,239 |
) |
Income
tax benefit (provision)
|
|
|
1,050
|
|
|
|
(131 |
) |
|
|
9,620
|
|
|
|
-
|
|
|
|
10,539
|
|
Equity
in losses of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
(47,779 |
) |
|
|
(2,574 |
) |
|
|
-
|
|
|
|
50,353
|
|
|
|
-
|
|
Net
loss
|
|
$ |
(15,887 |
) |
|
$ |
(4,245 |
) |
|
$ |
(46,108 |
) |
|
$ |
49,540
|
|
|
$ |
(16,700 |
) |
Condensed
Consolidating Statement of Operations
|
|
Six
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$ |
309,032
|
|
|
$ |
30,117
|
|
|
$ |
(19,786 |
) |
|
$ |
319,363
|
|
Cost
of revenues
|
|
|
178,684
|
|
|
|
24,480
|
|
|
|
(19,607 |
) |
|
|
183,557
|
|
Gross
profit
|
|
|
130,348
|
|
|
|
5,637
|
|
|
|
(179 |
) |
|
|
135,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
28,915
|
|
|
|
2,887
|
|
|
|
-
|
|
|
|
31,802
|
|
Product
development
|
|
|
27,880
|
|
|
|
248
|
|
|
|
(338 |
) |
|
|
27,790
|
|
General
and administrative
|
|
|
23,222
|
|
|
|
1,260
|
|
|
|
159
|
|
|
|
24,641
|
|
Amortization
of intangible assets
|
|
|
14,717
|
|
|
|
208
|
|
|
|
-
|
|
|
|
14,925
|
|
Total
operating expenses
|
|
|
94,734
|
|
|
|
4,603
|
|
|
|
(179 |
) |
|
|
99,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
35,614
|
|
|
|
1,034
|
|
|
|
-
|
|
|
|
36,648
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
708
|
|
|
|
94
|
|
|
|
(80 |
) |
|
|
722
|
|
Interest
expense
|
|
|
(8,100 |
) |
|
|
(311 |
) |
|
|
80
|
|
|
|
(8,331 |
) |
Other
income (expense), net
|
|
|
(676 |
) |
|
|
(13 |
) |
|
|
-
|
|
|
|
(689 |
) |
Total
other income (expense)
|
|
|
(8,068 |
) |
|
|
(230 |
) |
|
|
-
|
|
|
|
(8,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
27,546
|
|
|
|
804
|
|
|
|
-
|
|
|
|
28,350
|
|
Income
tax (provision) benefit
|
|
|
(11,508 |
) |
|
|
431
|
|
|
|
-
|
|
|
|
(11,077 |
) |
Equity
in earnings of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-guarantor
subsidiaries
|
|
|
1,235
|
|
|
|
-
|
|
|
|
(1,235 |
) |
|
|
-
|
|
Net
income
|
|
$ |
17,273
|
|
|
$ |
1,235
|
|
|
$ |
(1,235 |
) |
|
$ |
17,273
|
|
Condensed
Consolidating Balance Sheet
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
43,509
|
|
|
$ |
655
|
|
|
$ |
61,709
|
|
|
$ |
-
|
|
|
$ |
105,873
|
|
Accounts
receivable, net
|
|
|
87,144
|
|
|
|
8,255
|
|
|
|
230,571
|
|
|
|
-
|
|
|
|
325,970
|
|
Intercompany
accounts receivable
|
|
|
12,133
|
|
|
|
17
|
|
|
|
5,450
|
|
|
|
(17,600 |
) |
|
|
-
|
|
Inventories
|
|
|
51,034
|
|
|
|
6,196
|
|
|
|
114,782
|
|
|
|
(871 |
) |
|
|
171,141
|
|
Deferred
income taxes, net
|
|
|
19,957
|
|
|
|
615
|
|
|
|
4,953
|
|
|
|
-
|
|
|
|
25,525
|
|
Other
|
|
|
15,213
|
|
|
|
1,340
|
|
|
|
31,968
|
|
|
|
-
|
|
|
|
48,521
|
|
Intercompany
other
|
|
|
22,865
|
|
|
|
89,042
|
|
|
|
12,508
|
|
|
|
(124,415 |
) |
|
|
-
|
|
Total
current assets
|
|
|
251,855
|
|
|
|
106,120
|
|
|
|
461,941
|
|
|
|
(142,886 |
) |
|
|
677,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
86,190
|
|
|
|
12,639
|
|
|
|
211,125
|
|
|
|
-
|
|
|
|
309,954
|
|
Intangible
assets, net
|
|
|
90,247
|
|
|
|
-
|
|
|
|
533,128
|
|
|
|
-
|
|
|
|
623,375
|
|
Goodwill
|
|
|
114,469
|
|
|
|
5,902
|
|
|
|
1,128,423
|
|
|
|
-
|
|
|
|
1,248,794
|
|
Prepaid
debt fees
|
|
|
30,708
|
|
|
|
1,451
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,159
|
|
Deferred
income taxes, net
|
|
|
57,689
|
|
|
|
-
|
|
|
|
31,125
|
|
|
|
-
|
|
|
|
88,814
|
|
Investment
in subsidiaries
|
|
|
12,468
|
|
|
|
43,924
|
|
|
|
(46,021 |
) |
|
|
(10,371 |
) |
|
|
-
|
|
Intercompany
notes receivable
|
|
|
1,715,150
|
|
|
|
(346 |
) |
|
|
48,869
|
|
|
|
(1,763,673 |
) |
|
|
-
|
|
Other
|
|
|
2,463
|
|
|
|
15
|
|
|
|
12,645
|
|
|
|
-
|
|
|
|
15,123
|
|
Total
assets
|
|
$ |
2,361,239
|
|
|
$ |
169,705
|
|
|
$ |
2,381,235
|
|
|
$ |
(1,916,930 |
) |
|
$ |
2,995,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
38,665
|
|
|
$ |
4,545
|
|
|
$ |
166,993
|
|
|
$ |
-
|
|
|
$ |
210,203
|
|
Accrued
expenses
|
|
|
21,203
|
|
|
|
1,757
|
|
|
|
48,072
|
|
|
|
-
|
|
|
|
71,032
|
|
Intercompany
accounts payable
|
|
|
(209 |
) |
|
|
1,652
|
|
|
|
16,157
|
|
|
|
(17,600 |
) |
|
|
-
|
|
Wages
and benefits payable
|
|
|
16,468
|
|
|
|
1,667
|
|
|
|
41,083
|
|
|
|
-
|
|
|
|
59,218
|
|
Taxes
payable
|
|
|
(152 |
) |
|
|
(642 |
) |
|
|
24,628
|
|
|
|
-
|
|
|
|
23,834
|
|
Current
portion of debt
|
|
|
10,653
|
|
|
|
908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,561
|
|
Current
portion of warranty
|
|
|
8,482
|
|
|
|
139
|
|
|
|
10,240
|
|
|
|
-
|
|
|
|
18,861
|
|
Short-term
intercompany advances
|
|
|
94,231
|
|
|
|
6,061
|
|
|
|
24,123
|
|
|
|
(124,415 |
) |
|
|
-
|
|
Unearned
revenue
|
|
|
20,864
|
|
|
|
-
|
|
|
|
9,837
|
|
|
|
-
|
|
|
|
30,701
|
|
Total
current liabilities
|
|
|
210,205
|
|
|
|
16,087
|
|
|
|
341,133
|
|
|
|
(142,015 |
) |
|
|
425,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,521,156
|
|
|
|
89,871
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,611,027
|
|
Warranty
|
|
|
10,038
|
|
|
|
-
|
|
|
|
7,291
|
|
|
|
-
|
|
|
|
17,329
|
|
Pension
plan and other employee benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
65,040
|
|
|
|
-
|
|
|
|
65,040
|
|
Deferred
income taxes, net
|
|
|
59
|
|
|
|
(844 |
) |
|
|
211,175
|
|
|
|
-
|
|
|
|
210,390
|
|
Intercompany
notes payable
|
|
|
1,360
|
|
|
|
45,726
|
|
|
|
1,716,587
|
|
|
|
(1,763,673 |
) |
|
|
-
|
|
Other
obligations
|
|
|
13,253
|
|
|
|
-
|
|
|
|
36,986
|
|
|
|
-
|
|
|
|
50,239
|
|
Total
liabilities
|
|
|
1,756,071
|
|
|
|
150,840
|
|
|
|
2,378,212
|
|
|
|
(1,905,688 |
) |
|
|
2,379,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
598,861
|
|
|
|
25,110
|
|
|
|
41,534
|
|
|
|
(66,645 |
) |
|
|
598,860
|
|
Accumulated
other comprehensive income (loss), net
|
|
|
(16,182 |
) |
|
|
(549 |
) |
|
|
12,086
|
|
|
|
(77 |
) |
|
|
(4,722 |
) |
Retained
earnings (accumulated deficit)
|
|
|
22,489
|
|
|
|
(5,696 |
) |
|
|
(50,597 |
) |
|
|
55,480
|
|
|
|
21,676
|
|
Total
shareholders' equity
|
|
|
605,168
|
|
|
|
18,865
|
|
|
|
3,023
|
|
|
|
(11,242 |
) |
|
|
615,814
|
|
Total
liabilities and shareholders' equity
|
|
$ |
2,361,239
|
|
|
$ |
169,705
|
|
|
$ |
2,381,235
|
|
|
$ |
(1,916,930 |
) |
|
$ |
2,995,249
|
|
Condensed
Consolidating Balance Sheet
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
353,483
|
|
|
$ |
7,922
|
|
|
$ |
-
|
|
|
$ |
361,405
|
|
Short-term
investments, held to maturity
|
|
|
34,583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,583
|
|
Accounts
receivable, net
|
|
|
95,041
|
|
|
|
14,883
|
|
|
|
-
|
|
|
|
109,924
|
|
Intercompany
accounts receivable
|
|
|
6,486
|
|
|
|
3,263
|
|
|
|
(9,749 |
) |
|
|
-
|
|
Inventories
|
|
|
49,233
|
|
|
|
3,263
|
|
|
|
-
|
|
|
|
52,496
|
|
Deferred
income taxes, net
|
|
|
19,758
|
|
|
|
1,158
|
|
|
|
-
|
|
|
|
20,916
|
|
Other
|
|
|
15,394
|
|
|
|
1,727
|
|
|
|
-
|
|
|
|
17,121
|
|
Intercompany
other
|
|
|
1,698
|
|
|
|
5,000
|
|
|
|
(6,698 |
) |
|
|
-
|
|
Total
current assets
|
|
|
575,676
|
|
|
|
37,216
|
|
|
|
(16,447 |
) |
|
|
596,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
86,594
|
|
|
|
2,095
|
|
|
|
-
|
|
|
|
88,689
|
|
Intangible
assets, net
|
|
|
104,731
|
|
|
|
7,951
|
|
|
|
-
|
|
|
|
112,682
|
|
Goodwill
|
|
|
113,481
|
|
|
|
12,785
|
|
|
|
-
|
|
|
|
126,266
|
|
Prepaid
debt fees
|
|
|
13,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,161
|
|
Deferred
income taxes, net
|
|
|
44,702
|
|
|
|
2,698
|
|
|
|
-
|
|
|
|
47,400
|
|
Intercompany
notes receivable
|
|
|
12,257
|
|
|
|
1,242
|
|
|
|
(13,499 |
) |
|
|
-
|
|
Other
|
|
|
28,113
|
|
|
|
1,390
|
|
|
|
(25,624 |
) |
|
|
3,879
|
|
Total
assets
|
|
$ |
978,715
|
|
|
$ |
65,377
|
|
|
$ |
(55,570 |
) |
|
$ |
988,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
33,602
|
|
|
$ |
2,201
|
|
|
$ |
-
|
|
|
$ |
35,803
|
|
Accrued
expenses
|
|
|
6,392
|
|
|
|
10
|
|
|
|
-
|
|
|
|
6,402
|
|
Intercompany
accounts payable
|
|
|
3,263
|
|
|
|
6,486
|
|
|
|
(9,749 |
) |
|
|
-
|
|
Wages
and benefits payable
|
|
|
22,673
|
|
|
|
1,541
|
|
|
|
-
|
|
|
|
24,214
|
|
Taxes
payable
|
|
|
1,053
|
|
|
|
664
|
|
|
|
-
|
|
|
|
1,717
|
|
Current
portion of warranty
|
|
|
7,850
|
|
|
|
149
|
|
|
|
-
|
|
|
|
7,999
|
|
Short-term
intercompany advances
|
|
|
5,001
|
|
|
|
1,697
|
|
|
|
(6,698 |
) |
|
|
-
|
|
Unearned
revenue
|
|
|
26,004
|
|
|
|
1,445
|
|
|
|
-
|
|
|
|
27,449
|
|
Total
current liabilities
|
|
|
105,838
|
|
|
|
14,193
|
|
|
|
(16,447 |
) |
|
|
103,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
469,324
|
|
|
|
-
|
|
|
|
-
|
|
|
|
469,324
|
|
Warranty
|
|
|
10,149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,149
|
|
Intercompany
notes payable
|
|
|
1,241
|
|
|
|
12,258
|
|
|
|
(13,499 |
) |
|
|
-
|
|
Other
obligations
|
|
|
6,948
|
|
|
|
7,535
|
|
|
|
-
|
|
|
|
14,483
|
|
Total
liabilities
|
|
|
593,500
|
|
|
|
33,986
|
|
|
|
(29,946 |
) |
|
|
597,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock
|
|
|
351,018
|
|
|
|
30,113
|
|
|
|
(30,113 |
) |
|
|
351,018
|
|
Accumulated
other comprehensive income (loss), net
|
|
|
(4,179 |
) |
|
|
5,767
|
|
|
|
-
|
|
|
|
1,588
|
|
Retained
earnings (accumulated deficit)
|
|
|
38,376
|
|
|
|
(4,489 |
) |
|
|
4,489
|
|
|
|
38,376
|
|
Total
shareholders' equity
|
|
|
385,215
|
|
|
|
31,391
|
|
|
|
(25,624 |
) |
|
|
390,982
|
|
Total
liabilities and shareholders' equity
|
|
$ |
978,715
|
|
|
$ |
65,377
|
|
|
$ |
(55,570 |
) |
|
$ |
988,522
|
|
Condensed
Consolidating Statement of Cash Flows
|
Six
Months Ended June 30, 2007
|
|
|
Parent
|
|
|
Combined
Guarantor Subsidiaries
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(15,887 |
) |
|
$ |
(4,245 |
) |
|
$ |
(46,108 |
) |
|
$ |
49,540
|
|
|
$ |
(16,700 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
21,780
|
|
|
|
412
|
|
|
|
24,964
|
|
|
|
-
|
|
|
|
47,156
|
|
In-process
research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
35,551
|
|
|
|
-
|
|
|
|
35,551
|
|
Employee
stock plans income tax benefits
|
|
|
5,773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,773
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(5,029 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,029 |
) |
Stock-based
compensation
|
|
|
5,849
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,849
|
|
Amortization
of prepaid debt fees
|
|
|
2,717
|
|
|
|
96
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,813
|
|
Deferred
income taxes, net
|
|
|
(6,832 |
) |
|
|
(1,072 |
) |
|
|
(22,229 |
) |
|
|
-
|
|
|
|
(30,133 |
) |
Other,
net
|
|
|
48,170
|
|
|
|
2,571
|
|
|
|
6
|
|
|
|
(50,353 |
) |
|
|
394
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
7,897
|
|
|
|
(1,817 |
) |
|
|
(18,684 |
) |
|
|
-
|
|
|
|
(12,604 |
) |
Inventories
|
|
|
(1,797 |
) |
|
|
913
|
|
|
|
18,054
|
|
|
|
813
|
|
|
|
17,983
|
|
Trade
payables, accrued expenses and taxes payable
|
|
|
22,453
|
|
|
|
2,016
|
|
|
|
1,342
|
|
|
|
-
|
|
|
|
25,811
|
|
Wages
and benefits payable
|
|
|
(6,205 |
) |
|
|
169
|
|
|
|
(1,263 |
) |
|
|
-
|
|
|
|
(7,299 |
) |
Unearned
revenue
|
|
|
(4,856 |
) |
|
|
-
|
|
|
|
508
|
|
|
|
-
|
|
|
|
(4,348 |
) |
Warranty
|
|
|
639
|
|
|
|
14
|
|
|
|
(262 |
) |
|
|
-
|
|
|
|
391
|
|
Other
long-term obligations
|
|
|
194
|
|
|
|
-
|
|
|
|
(241 |
) |
|
|
-
|
|
|
|
(47 |
) |
Intercompany
transactions, net
|
|
|
(9,119 |
) |
|
|
1,635
|
|
|
|
7,484
|
|
|
|
-
|
|
|
|
-
|
|
Other,
net
|
|
|
785
|
|
|
|
(981 |
) |
|
|
(2,446 |
) |
|
|
-
|
|
|
|
(2,642 |
) |
Net
cash provided by (used in) operating activities
|
|
|
66,532
|
|
|
|
(289 |
) |
|
|
(3,324 |
) |
|
|
-
|
|
|
|
62,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
from the maturities of investments, held to maturity
|
|
|
35,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,000
|
|
Acquisitions
of property, plant and equipment
|
|
|
(12,907 |
) |
|
|
6,779
|
|
|
|
(12,178 |
) |
|
|
-
|
|
|
|
(18,306 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(1,715,626 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,715,626 |
) |
Cash
transferred to parent
|
|
|
-
|
|
|
|
(89,042 |
) |
|
|
-
|
|
|
|
89,042
|
|
|
|
-
|
|
Cash
transferred to non-guarantor subsidiaries
|
|
|
(22,492 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
22,492
|
|
|
|
-
|
|
Intercompany
notes, net
|
|
|
52,360
|
|
|
|
346
|
|
|
|
(52,706 |
) |
|
|
-
|
|
|
|
-
|
|
Other,
net
|
|
|
(41,253 |
) |
|
|
(52,097 |
) |
|
|
99,247
|
|
|
|
-
|
|
|
|
5,897
|
|
Net
cash provided by (used in) investing activities
|
|
|
(1,704,918 |
) |
|
|
(134,014 |
) |
|
|
34,363
|
|
|
|
111,534
|
|
|
|
(1,693,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings
|
|
|
1,068,248
|
|
|
|
90,779
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,159,027
|
|
Payments
on debt
|
|
|
(2,890 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,890 |
) |
Issuance
of common stock
|
|
|
236,220
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236,220
|
|
Excess
tax benefits from stock-based compensation
|
|
|
5,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,029
|
|
Prepaid
debt fees
|
|
|
(21,511 |
) |
|
|
(1,547 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(23,058 |
) |
Cash
transferred from parent
|
|
|
89,042
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(89,042 |
) |
|
|
-
|
|
Cash
transferred from non-guarantor subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
22,492
|
|
|
|
(22,492 |
) |
|
|
-
|
|
Intercompany
notes payable
|
|
|
(45,726 |
) |
|
|
45,726
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,328,412
|
|
|
|
134,958
|
|
|
|
22,492
|
|
|
|
(111,534 |
) |
|
|
1,374,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
256
|
|
|
|
-
|
|
|
|
256
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(309,974 |
) |
|
|
655
|
|
|
|
53,787
|
|
|
|
-
|
|
|
|
(255,532 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
353,483
|
|
|
|
-
|
|
|
|
7,922
|
|
|
|
-
|
|
|
|
361,405
|
|
Cash
and cash equivalents at end of period
|
|
$ |
43,509
|
|
|
$ |
655
|
|
|
$ |
61,709
|
|
|
$ |
-
|
|
|
$ |
105,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
operating and investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
1,593
|
|
|
$ |
-
|
|
|
$ |
1,913
|
|
|
$ |
-
|
|
|
$ |
3,506
|
|
Pre-acquisition
costs incurred but not yet paid
|
|
|
1,006
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
2,661
|
|
|
$ |
-
|
|
|
$ |
4,764
|
|
|
$ |
-
|
|
|
$ |
7,425
|
|
Interest
|
|
|
29,466
|
|
|
|
1,670
|
|
|
|
136
|
|
|
|
-
|
|
|
|
31,272
|
|
Condensed
Consolidating Statement of Cash Flows
|
Six
Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Combined
Non-guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in
thousands)
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
17,273
|
|
|
$ |
1,235
|
|
|
$ |
(1,235 |
) |
|
$ |
17,273
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
21,734
|
|
|
|
557
|
|
|
|
-
|
|
|
|
22,291
|
|
Employee
stock plans income tax benefits
|
|
|
11,686
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,686
|
|
Excess
tax benefits from stock-based compensation
|
|
|
(8,371 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(8,371 |
) |
Stock-based
compensation
|
|
|
4,096
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,096
|
|
Amortization
of prepaid debt fees
|
|
|
3,107
|
|
|
|
48
|
|
|
|
-
|
|
|
|
3,155
|
|
Deferred
income taxes, net
|
|
|
712
|
|
|
|
(1,665 |
) |
|
|
-
|
|
|
|
(953 |
) |
Other,
net
|
|
|
(782 |
) |
|
|
(18
|
) |
|
|
1,235
|
|
|
|
435
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
22,357
|
|
|
|
(4,319 |
) |
|
|
-
|
|
|
|
18,038
|
|
Inventories
|
|
|
(10,974 |
) |
|
|
1,399
|
|
|
|
-
|
|
|
|
(9,575 |
) |
Long-term
note receivable, net
|
|
|
1,298
|
|
|
|
(1,298 |
) |
|
|
-
|
|
|
|
-
|
|
Trade
payables, accrued expenses and taxes payable
|
|
|
(17 |
) |
|
|
1,159
|
|
|
|
-
|
|
|
|
1,142
|
|
Wages
and benefits payable
|
|
|
(3,590 |
) |
|
|
(33 |
) |
|
|
-
|
|
|
|
(3,623 |
) |
Unearned
revenue
|
|
|
3,755
|
|
|
|
475
|
|
|
|
-
|
|
|
|
4,230
|
|
Warranty
|
|
|
1,634
|
|
|
|
44
|
|
|
|
-
|
|
|
|
1,678
|
|
Other
long-term obligations
|
|
|
(1,008 |
) |
|
|
827
|
|
|
|
-
|
|
|
|
(181 |
) |
Intercompany
transactions, net
|
|
|
(6,922 |
) |
|
|
6,922
|
|
|
|
-
|
|
|
|
-
|
|
Other,
net
|
|
|
(5,069 |
) |
|
|
519
|
|
|
|
-
|
|
|
|
(4,550 |
) |
Net
cash provided by operating activities
|
|
|
50,919
|
|
|
|
5,852
|
|
|
|
-
|
|
|
|
56,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of property, plant and equipment
|
|
|
(13,787 |
) |
|
|
(633 |
) |
|
|
-
|
|
|
|
(14,420 |
) |
Business
acquisitions, net of cash and cash equivalents acquired
|
|
|
(5,347 |
) |
|
|
(2,431 |
) |
|
|
-
|
|
|
|
(7,778 |
) |
Cash
transferred to parent
|
|
|
-
|
|
|
|
(946 |
) |
|
|
946
|
|
|
|
-
|
|
Cash
transferred to non-guarantor subsidiaries
|
|
|
(100 |
) |
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
Intercompany
notes, net
|
|
|
(4,567 |
) |
|
|
-
|
|
|
|
4,567
|
|
|
|
-
|
|
Other,
net
|
|
|
(314 |
) |
|
|
1,758
|
|
|
|
-
|
|
|
|
1,444
|
|
Net
cash used in investing activities
|
|
|
(24,115 |
) |
|
|
(2,252 |
) |
|
|
5,613
|
|
|
|
(20,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on debt
|
|
|
(39,476 |
) |
|
|
(3,227 |
) |
|
|
-
|
|
|
|
(42,703 |
) |
Issuance
of common stock
|
|
|
11,326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,326
|
|
Excess
tax benefits from stock-based compensation
|
|
|
8,371
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,371
|
|
Prepaid
debt fees
|
|
|
(62 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(62 |
) |
Intercompany
notes, net
|
|
|
-
|
|
|
|
4,567
|
|
|
|
(4,567 |
) |
|
|
-
|
|
Cash
received from parent
|
|
|
-
|
|
|
|
100
|
|
|
|
(100 |
) |
|
|
-
|
|
Cash
received from non-guarantor subsidiaries
|
|
|
946
|
|
|
|
-
|
|
|
|
(946 |
) |
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(18,895 |
) |
|
|
1,440
|
|
|
|
(5,613 |
) |
|
|
(23,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
7,909
|
|
|
|
5,040
|
|
|
|
-
|
|
|
|
12,949
|
|
Cash
and cash equivalents at beginning of period
|
|
|
28,064
|
|
|
|
5,574
|
|
|
|
-
|
|
|
|
33,638
|
|
Cash
and cash equivalents at end of period
|
|
$ |
35,973
|
|
|
$ |
10,614
|
|
|
$ |
-
|
|
|
$ |
46,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
operating and investing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased but not yet paid
|
|
$ |
3,082
|
|
|
$ |
21
|
|
|
$ |
-
|
|
|
$ |
3,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
637
|
|
|
$ |
196
|
|
|
$ |
-
|
|
|
$ |
833
|
|
Interest
|
|
|
5,440
|
|
|
|
183
|
|
|
|
-
|
|
|
|
5,623
|
|
Item 2: Management’s
Discussion and
Analysis of Financial Condition and Results of Operations
In
this
Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Itron” and the
“Company” refer to Itron, Inc.
The
following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes included in
this
report and with our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (SEC) on February 23, 2007.
Our
SEC
filings are available free of charge under the Investors section of our website
at www.itron.com as soon as practicable after they are filed with or
furnished to the SEC. In addition, our filings are available at the SEC’s
website (www.sec.gov) and at the SEC’s Headquarters at 100 F Street,
NE, Washington, DC 20549, or by calling 1-800-SEC-0330.
Certain
Forward-Looking Statements
This
document contains forward-looking statements concerning our operations,
financial performance, revenues, earnings growth, estimated stock-based
compensation expense, pension liability cost reduction programs and other items.
These statements reflect our current plans and expectations and are based on
information currently available as of the date of this Quarterly Report on
Form
10-Q. When we use the words “expect,” “intend,” “anticipate,” “believe,” “plan,”
“project,” “estimate,” “future,” “objective,” “may,” “will,” “will continue” and
similar expressions they are intended to identify forward-looking statements.
Any statements that refer to expectations, projections or other
characterizations of future events or circumstances are also forward-looking
statements. Forward-looking statements rely on a number of assumptions and
estimates. These assumptions and estimates could be inaccurate and cause our
actual results to vary materially from expected results. Risks and uncertainties
include 1) the rate and timing of customer demand for our products, 2)
rescheduling or cancellations of current customer orders, 3) changes in
estimated liabilities for product warranties, 4) changes in domestic and foreign
laws and regulations, 5) our dependence on new product development and
intellectual property, 6) current and future business combinations, 7) changes
in estimates for stock-based compensation, 8) changes in foreign currency
exchange rates, 9) foreign business risks and 10) other factors. You should
not
rely on these forward-looking statements as they speak only as of the date
of
this Quarterly Report on Form 10-Q. We do not have any obligation to publicly
update or revise any forward-looking statement in this document. For a more
complete description of these and other risks, see “Risk Factors” within
Item 1A included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2006, which was filed with the SEC on February 23,
2007.
Results
of Operations
We
derive
the majority of our revenues from sales of products and services to utilities.
Revenues include hardware, software, post-sale maintenance and professional
services. Cost of revenues includes materials, direct labor, warranty expense,
other manufacturing spending, distribution and documentation costs for software
applications and labor and operating costs for professional services.
Overview
On
April
18, 2007, we completed the acquisition of Actaris Metering Systems SA (Actaris)
for €800 million (approximately $1.1 billion) plus the retirement of
approximately $626.9 million of debt. The acquisition was financed with a $1.2
billion credit facility (credit facility), $225 million in net proceeds from
the
sale of our common stock and cash on hand. The Actaris acquisition includes
all
of Actaris’ electricity, gas and water meter manufacturing and sales operations,
located primarily outside of North America. This acquisition allows Actaris
to
offer Itron’s automated meter reading (AMR) and advanced metering infrastructure
(AMI) technologies, software and systems to customers outside of North America
and expand Actaris’ gas and water meter opportunities in North America. Our
combined company now has more than 8,000 utility customers, over 30
manufacturing facilities, operates in more than 60 countries and has more than
8,500 employees. Actaris will continue to operate fundamentally as it did before
the acquisition.
The
acquisition of Actaris significantly changes many aspects of our results of
operations, financial condition and cash flows, which are described in each
applicable area within the discussion that follows.
Total
Company Revenues, Gross Profit and Margin and Unit
Shipments
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
(in millions, except gross margin)
|
|
|
(in millions, except gross margin) |
|
Revenues
|
$ |
401.6
|
|
|
$ |
163.8
|
|
|
|
145 |
% |
|
$ |
549.5
|
|
|
$ |
319.4
|
|
|
|
72 |
% |
Gross
Profit
|
$ |
124.7
|
|
|
$ |
69.0
|
|
|
|
81 |
% |
|
$ |
186.0
|
|
|
$ |
135.8
|
|
|
|
37 |
% |
Gross
Margin
|
|
31 |
% |
|
|
42 |
% |
|
|
|
|
|
|
34 |
% |
|
|
43 |
% |
|
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
(in
millions)
|
Revenues
by region
|
|
|
|
|
|
|
|
|
|
Europe
|
$ |
187.0
|
|
|
$ |
1.4
|
|
$ |
188.5
|
|
|
$ |
2.0
|
United
States and Canada
|
|
148.5
|
|
|
|
154.6
|
|
|
284.9
|
|
|
|
305.0
|
Other
|
|
66.1
|
|
|
|
7.8
|
|
|
76.1
|
|
|
|
12.4
|
Total
revenues
|
$ |
401.6
|
|
|
$ |
163.8
|
|
$ |
549.5
|
|
|
$ |
319.4
|
Revenues
Revenues
increased $237.8 million and $230.1 million for the three and six months ended
June 30, 2007, respectively, of which Actaris contributed $249.7 million. Itron
North America revenues decreased $11.9 million and $19.6 million for the three
and six months ended June 30, 2007 compared with the same periods in 2006,
respectively.
No
single
customer represented more than 10% of total Company revenues for the three
and
six months ended June 30, 2007. One customer, Progress Energy, accounted for
19%
and 21% of total Company revenues for the three and six months ended June 30,
2006, respectively.
Gross
Profit and Margin
Gross
margin was 31% and 34% for the three and six months ended June 30, 2007,
compared with 42% and 43% for the same periods last year, respectively. Business
combination accounting rules require the valuation of inventory on hand at
the
acquisition date to equal the sales price, less costs to complete and a
reasonable profit allowance for selling effort. Accordingly, the historical
cost
of inventory acquired was increased by $16.0 million, which lowered gross
margins by four percentage points and three percentage points for the three
and
six months ended June 30, 2007, respectively. Gross margin for Actaris’ products
and services is lower than Itron North America’s as a result of Actaris’ product
mix of higher meter sales as compared with Itron North America’s systems focused
products.
Unit
Shipments
Meters
can be sold with and without AMR. In addition, AMR can be sold separately from
the meter. We also use other vendors’ AMR technology in our meters. Meter and
AMR shipments are as follows:
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
(in
thousands)
|
Total
meters (with and without AMR)
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
2,450
|
|
|
|
1,850
|
|
|
3,600
|
|
|
|
3,575
|
Gas
|
|
775
|
|
|
|
-
|
|
|
775
|
|
|
|
-
|
Water
|
|
1,850
|
|
|
|
-
|
|
|
1,850
|
|
|
|
-
|
Total
meters
|
|
5,075
|
|
|
|
1,850
|
|
|
6,225
|
|
|
|
3,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMR
units (Itron and Actaris)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meters
with AMR
|
|
900
|
|
|
|
1,300
|
|
|
1,400
|
|
|
|
2,500
|
AMR
modules
|
|
1,150
|
|
|
|
1,000
|
|
|
2,350
|
|
|
|
2,075
|
Total
AMR units
|
|
2,050
|
|
|
|
2,300
|
|
|
3,750
|
|
|
|
4,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
vendors' AMR
|
|
175
|
|
|
|
225
|
|
|
425
|
|
|
|
375
|
Segment
Revenues, Gross Profit and Margin and Operating Income
(Loss)
At
December 31, 2006, we reported three operating segments reflecting our major
product lines. With the Actaris acquisition on April 18, 2007, we aligned our
operating segments into two groups, Itron North America and Actaris, to reflect
the way we are now managing the business. Our Itron North America operating
segment represents the operations of Itron prior to the Actaris acquisition,
with operations primarily located in North America. Our Actaris operating
segment represents the operations of the Actaris acquisition, which are
primarily located outside of North America. We have three measures of segment
performance: revenue, gross profit (margin) and operating income. There were
no
intersegment revenues.
Corporate
operating expenses, interest income, interest expense, other income (expense)
and income tax expense (benefit) are not allocated to the segments, nor included
in the measure of segment profit or loss. Assets and liabilities are not used
in
our measurement of segment performance and, therefore, are not allocated to
our
segments. Approximately 99% of depreciation expense was allocated to our
segments at June 30, 2007 and 2006, with the remaining portion reported under
corporate unallocated.
Segment
Products
Itron
North America
|
Electricity
meters with and without automated meter reading (AMR); gas and water
AMR
modules; handheld, mobile and network AMR data collection
technologies; advanced metering infrastructure (AMI) technologies;
software, installation, implementation, maintenance support and other
services.
|
|
|
Actaris
|
Electromechanical
and electronic electricity meters; mechanical and ultrasonic water
and
heat meters and diaphragms; turbine and rotary gas meters; one-way
and
two-way electricity prepayment systems, including smart key, keypad
and
smart card; two-way gas prepayment systems using smart card; AMR
data
collection technologies; installation, implementation, maintenance
support
and other services.
|
|
The
following tables and discussion highlight significant changes in
trends or
components of each segment.
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
%
Change
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
Segment
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
|
|
$ |
151.9
|
|
|
$ |
163.8
|
|
|
|
-7 |
% |
|
|
|
|
$ |
299.8
|
|
|
$ |
319.4
|
|
|
|
-6 |
% |
|
|
|
Actaris
|
|
|
249.7
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
249.7
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
401.6
|
|
|
$ |
163.8
|
|
|
|
145 |
% |
|
|
|
|
$ |
549.5
|
|
|
$ |
319.4
|
|
|
|
72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
Gross
Profit
|
|
|
Gross
Margin
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
Segment
Gross Profit and Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
|
|
$ |
63.4
|
|
|
|
42
|
% |
|
$ |
69.0
|
|
|
|
42 |
% |
|
$ |
124.7
|
|
|
|
42 |
% |
|
$ |
135.8
|
|
|
|
43 |
% |
Actaris
|
|
|
61.3
|
|
|
|
25 |
% |
|
|
-
|
|
|
|
|
|
|
|
61.3
|
|
|
|
25 |
% |
|
|
-
|
|
|
|
|
|
Total
gross profit and margin
|
|
$ |
124.7
|
|
|
|
31 |
% |
|
$ |
69.0
|
|
|
|
42 |
% |
|
$ |
186.0
|
|
|
|
34 |
% |
|
$ |
135.8
|
|
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Operating
Income
(Loss)
|
|
Operating
Margin
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
|
Operating
Income
(Loss)
|
|
Operating
Margin
|
|
Operating
Income (Loss)
|
|
|
Operating
Margin
|
Segment
Operating Income (Loss)
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
and
Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itron
|
|
$ |
16.1
|
|
|
|
11 |
% |
|
$ |
23.9
|
|
|
|
15 |
% |
|
$ |
32.9
|
|
|
|
11 |
% |
|
$ |
50.1
|
|
|
|
16 |
% |
Actaris
|
|
|
(31.7 |
) |
|
|
-13 |
% |
|
|
-
|
|
|
|
|
|
|
|
(31.7 |
) |
|
|
-13 |
% |
|
|
-
|
|
|
|
|
|
Corporate
unallocated
|
|
|
(7.8 |
) |
|
|
|
|
|
|
(6.3 |
) |
|
|
|
|
|
|
(15.3 |
) |
|
|
|
|
|
|
(13.5 |
) |
|
|
|
|
Total
operating income and margin
|
|
$ |
(23.4 |
) |
|
|
-6 |
% |
|
$ |
17.6
|
|
|
|
11 |
% |
|
$ |
(14.1 |
) |
|
|
-3 |
% |
|
$ |
36.6
|
|
|
|
11 |
% |
Itron
North America: Revenues decreased $11.9 million, or 7%, in
the second quarter of 2007, and $19.6 million, or 6%, in the six months ended
June 30, 2007, compared with the same periods in 2006. Shipments of electricity
meters decreased 36% and 35% for the three and six months ended June 30, 2007,
compared with the same periods in 2006, respectively. During the second quarter
and first six months of 2006, we shipped over 700,000 meters and 1.6 million
meters under the Progress Energy contract, respectively. This accelerated
delivery schedule, which was completed at the end of 2006, temporarily increased
our typical electricity meter production levels, resulting in increased revenues
and higher overhead absorption. Shipments of AMR modules increased 4% and 2%
for
the three and six months ended June 30, 2007. Gross margin remained constant
at
42% for the three months ended June 30, 2007, compared with same period in
2006.
Gross margin decreased one percentage point, as a result of our lower overhead
absorption, for the six months ended June 30, 2007, compared with the same
period in 2006.
No
single
customer represented more than 10% of Itron North America operating segment
revenues for the three and six months ended June 30, 2007. One customer,
Progress Energy, accounted for 19% and 21% of the Itron North America operating
segment revenues for the three and six months ended June 30, 2006,
respectively.
Itron
North America operating expenses as a percentage of revenues were 31% for the
three and six months ended June 30, 2007, compared with 28% and 27% for the
same
periods in 2006, respectively. Research and development costs have increased
as
a percentage of revenue from 9% in 2006 to approximately 11% in 2007 as a result
of the development of our AMI solution.
Actaris: Actaris
was acquired on April 18, 2007. Revenues from the date of acquisition to June
30, 2007 were $249.7 million, with 40%, 31% and 29% from electricity, gas
and water meter products and services, respectively. Gross margin for the period
was 25%. Business combination accounting rules require the valuation of
inventory on hand at the acquisition date to equal the sales price, less costs
to complete and a reasonable profit allowance for selling effort. Accordingly,
the historical cost of inventory acquired was increased by $16.0 million, which
lowered gross margins by six percentage points.
No
single
customer represented more than 10% of the Actaris operating segment revenues
from April 18, 2007 to June 30, 2007.
Operating
expenses for Actaris were $93.0 million from the date of acquisition to June
30,
2007 of which $35.6 million represented in-process research and development
(IPR&D) related to the acquisition. We anticipate that operating expenses
for Actaris will be lower as a percentage of revenue, compared with Itron North
America, as a result of more meter centric product sales versus meter reading
system sales, partially offset by higher amortization expense of intangible
assets.
Corporate
unallocated: Operating expenses not directly associated
with an operating segment are classified as “Corporate unallocated.” These
expenses as a percentage of total Company revenues were 2% and 3% for the three
and six months ended June 30, 2007, respectively, compared with 4% in each
of the same periods of 2006.
New
Order Bookings and Backlog
Bookings
for a reported period represent contracts and purchase orders received during
the specified period. Total backlog represents committed but undelivered
contracts and purchase orders at period end. Twelve-month backlog represents
the
portion of total backlog that we estimate will be recognized as revenue over
the
next twelve months. Bookings and backlog exclude maintenance-related activity.
Backlog is not a complete measure of our future business as we have a
significant portion of our business that is book-and-ship. Bookings and backlog
can fluctuate significantly due to the timing of large project awards. In
addition, annual or multi-year contracts are subject to rescheduling and
cancellation by customers due to the long-term nature of the contracts.
Beginning total backlog, plus bookings, less revenues will not always equal
ending total backlog due to miscellaneous contract adjustments and other
factors.
Information
on new orders during the quarter and backlog at quarter-end is summarized as
follows:
Quarter
Ended
|
|
Total
Bookings
|
|
|
Total
Backlog
|
|
|
12-Month
Backlog
|
|
|
(in
millions)
|
June
30, 2007
|
|
$ |
413
|
|
|
$ |
656
|
|
|
$ |
491
|
March
31, 2007
|
|
|
118
|
|
|
|
376
|
|
|
|
225
|
December
31, 2006
|
|
|
211
|
|
|
|
392
|
|
|
|
225
|
September
30, 2006
|
|
|
128
|
|
|
|
325
|
|
|
|
194
|
June
30, 2006
|
|
|
107
|
|
|
|
351
|
|
|
|
225
|
March
31, 2006
|
|
|
206
|
|
|
|
387
|
|
|
|
241
|
New
order
bookings for the three months ended June 30, 2007 were $413 million. Acquired
backlog from the Actaris acquisition was $262 million.
Operating
Expenses
The
following table details our total operating expenses in dollars and as a
percentage of revenues.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
%
of Revenue
|
|
|
2006
|
|
|
%
of Revenue
|
|
|
2007
|
|
|
%
of Revenue
|
|
|
2006
|
|
|
%
of Revenue
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
(millions)
|
|
|
|
|
Sales
and marketing
|
|
$ |
34.4
|
|
|
|
9 |
% |
|
$ |
16.3
|
|
|
|
10 |
% |
|
$ |
49.3
|
|
|
|
9 |
% |
|
$ |
31.8
|
|
|
|
10 |
% |
Product
development
|
|
|
25.5
|
|
|
|
6 |
% |
|
|
14.9
|
|
|
|
9 |
% |
|
|
41.3
|
|
|
|
7 |
% |
|
|
27.8
|
|
|
|
9 |
% |
General
and administrative
|
|
|
27.4
|
|
|
|
7 |
% |
|
|
12.6
|
|
|
|
7 |
% |
|
|
41.6
|
|
|
|
8 |
% |
|
|
24.7
|
|
|
|
8 |
% |
Amortization
of intangible assets
|
|
|
25.2
|
|
|
|
6 |
% |
|
|
7.6
|
|
|
|
5 |
% |
|
|
32.3
|
|
|
|
6 |
% |
|
|
14.9
|
|
|
|
4 |
% |
In-process
research and development
|
|
|
35.6
|
|
|
|
9 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
35.6
|
|
|
|
6 |
% |
|
|
-
|
|
|
|
-
|
|
Total
operating expenses
|
|
$ |
148.1
|
|
|
|
37 |
% |
|
$ |
51.4
|
|
|
|
31 |
% |
|
$ |
200.1
|
|
|
|
36 |
% |
|
$ |
99.2
|
|
|
|
31 |
% |
Operating
expenses for the three and six months ended June 30, 2007 contain Actaris’
operating expenses from April 18, 2007, the date of acquisition. Actaris’
operating expenses as a percentage of revenue are typically lower than our
historical operations due to a more meter centric product offering versus AMR
system offering. Itron North America’s product development costs have increased
as a percentage of revenue from 9% in 2006 to approximately 11% in 2007 as
a
result of the development of our AMI solution. The increase in Itron North
America’s product development was offset by Actaris’ product development costs
of 3% as a percentage of revenues. Although we expect general and administrative
expenses to decrease as a percentage of revenue as a result of efficiencies
of
scale from the acquisition of Actaris, in the near term we expect to incur
higher professional services and indirect cost, including those associated
with
Sarbanes-Oxley compliance.
In-Process
Research and Development Expenses
Our
acquisition of Actaris resulted in $35.6 million of IPR&D expense,
consisting primarily of next generation technology. The IPR&D projects were
analyzed according to exclusivity, substance, economic benefit, incompleteness,
measurability and alternative future use. The primary projects are intended
to
make key enhancements and improve functionality of our residential and
commercial and industrial meters. We value IPR&D using the income approach,
which uses the present value of the projected cash flows that are expected
to be
generated. The risk adjusted discount rate was 12 percent, which was based
on an
industry composite of weighted average cost of capital, with certain premiums
for equity risk and size, and the uncertainty associated with the completion
of
the development effort and subsequent commercialization. We estimate these
research and development projects to be approximately 35% complete, when
compared against the costs Actaris incurred prior to the acquisition. We
estimate the cost to complete these projects will be approximately $16 million
over the next two years, which we will record as research and development
expense as the costs are incurred.
Our
future success depends, in part, on our ability to continue to design and
manufacture new competitive products and to enhance and sustain our existing
products. However, we may experience unforeseen problems in the development
or
performance of our technologies or products; we may not meet our product
development schedules; or we may not achieve market acceptance of our new
products or solutions.
Other
Income (Expense)
The
following table shows the components of other income (expense).
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Interest
income
|
|
$ |
2,216
|
|
|
$ |
360
|
|
|
$ |
8,305
|
|
|
$ |
722
|
|
Interest
expense
|
|
|
(20,872 |
) |
|
|
(2,202 |
) |
|
|
(25,611 |
) |
|
|
(5,176 |
) |
Amortization
of debt placement fees
|
|
|
(2,055 |
) |
|
|
(383 |
) |
|
|
(2,813 |
) |
|
|
(3,155 |
) |
Other
income (expense), net
|
|
|
5,433
|
|
|
|
(241 |
) |
|
|
6,941
|
|
|
|
(689 |
) |
Total
other income (expense)
|
|
$ |
(15,278 |
) |
|
$ |
(2,466 |
) |
|
$ |
(13,178 |
) |
|
$ |
(8,298 |
) |
The
increase in interest income of $1.9 million and $7.6 million for the three
and
six months ended June 30, 2007, compared with the same periods in 2006 was
the
result of our higher cash and cash equivalent balances and short-term
investments from our August 2006 issuance of $345 million 2.50% convertible
senior subordinated notes (convertible notes) and our March 1, 2007 issuance
of
$225 million in net proceeds from the sale of 4.1 million shares of common
stock.
The
increase in interest expense in the three and six months ended June 30, 2007,
compared with the same periods in 2006, is primarily the result of the new
$1.2
billion credit facility used to finance the Actaris acquisition. Interest
expense also increased as a result of our $345 million 2.50% convertible notes
issued in August 2006. Average outstanding borrowings were $1.4 billion and
$943.2 million for the three and six months ended June 30, 2007, compared with
$124.6 million and $139.6 million for the same periods in 2006,
respectively. The increase in amortization of debt placement fees is the result
of these new borrowings.
Other
income (expense) for the three months ended June 30, 2007 consists primarily
of
foreign currency fluctuations, including $3.0 million of unrealized foreign
currency gains associated with our euro denominated borrowings, $1.2 million
in
net realized gains from foreign currency range forward contracts that were
settled and $1.0 million realized gain from an overnight euro rate change prior
to the acquisition. For the six months ended June 30, 2007, we also recognized
income of $1.6 million from the foreign currency range forward contract, which
was an unrealized gain at March 31, 2007.
Income
Taxes
Our
actual income tax rates typically differ from the federal statutory rate of
35%,
and can vary from period to period, due to fluctuations in operating results,
new or revised tax legislation and accounting pronouncements, changes in the
level of business performed in domestic and international jurisdictions,
research credits and state income taxes. We estimate that our 2007 actual income
tax rate will be approximately 38%.
At
June
30, 2006, our estimated annual effective income tax rate was 42%, while our
actual income tax rate was 33% and 39% for the three and six months ended June
30, 2006. At June 30, 2006, our effective tax rate did not include a federal
research credit, as the credit had expired. In December 2006, the Tax Relief
and
Health Care Act was signed into law, extending the research tax credit for
qualified research expenses incurred throughout 2006 and 2007. This legislation
reduced our estimated 2007 annual effective tax rate as compared with the
estimated 2006 annual effective tax rate at June 30, 2006.
Effective
January 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB 109 (FIN 48). Although our implementation
of FIN 48 did not require a cumulative effect adjustment to retained earnings,
we recorded $6.1 million of deferred tax assets and noncurrent liabilities
to conform to the balance sheet presentation requirements of FIN 48. As of
January 1, 2007 and June 30 2007, the amount of unrecognized tax benefits was
$6.1 million and $35.9 million, respectively. Approximately $29.3 million of
unrecognized tax benefits were acquired as part of the Actaris acquisition
on
April 18, 2007. We do not expect any reasonably possible material changes to
the
estimated amount of liability associated with our unrecognized tax benefits
through June 30, 2008. The amount of unrecognized tax benefits that would affect
our actual tax rate as of January 1, 2007 and June 30, 2007 was $6.1 million
and
$6.9 million, respectively.
We
are
subject to income tax in the U.S. federal jurisdiction and numerous state
jurisdictions. The Internal Revenues Service (IRS) has completed its
examinations of our federal income tax returns for the tax years 1993 through
1995. Tax years subsequent to 1995 remain open to examination by the major
tax
jurisdictions to which we are subject. We classify interest and penalties
related to unrecognized tax benefits in our provision for income taxes. Accrued
interest and penalties were $9,000 and $7.4 million at January 1, 2007 and
June
30, 2007, respectively. The increase from January 1, 2007 to June 30, 2007
was
the result of the Actaris acquisition on April 18, 2007.
Financial
Condition
Cash
Flow Information:
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
millions)
|
|
Operating
activities
|
|
$ |
62.9
|
|
|
$ |
56.8
|
|
Investing
activities
|
|
|
(1,693.0 |
) |
|
|
(20.8 |
) |
Financing
activities
|
|
|
1,374.3
|
|
|
|
(23.1 |
) |
Effect
of exchange rates on cash and cash equivalents
|
|
|
0.3
|
|
|
|
-
|
|
Increase
(decrease) in cash and cash equivalents
|
|
$ |
(255.5 |
) |
|
$ |
12.9
|
|
The
Actaris acquisition on April 18, 2007 was funded with a $1.2 billion credit
facility, $225 million in net proceeds from the sale of 4.1 million shares
of common stock and cash on hand.
Operating
activities: Cash provided by operating activities increased $6.1 million in
the first six months of 2007, compared with the same period in 2006. This
increase is primarily the result of the increase in revenue activity due to
our
acquisition of Actaris. This increased revenue activity resulted in cash
received from customers of $532.5 million for the six months ended June 30,
2007, compared with $341.6 million for the six months ended June 30, 2006.
Cash
paid to suppliers and employees also increased and was $165.5 million more
for
the six months ended June 30, 2007, compared with the same period in 2006.
This
increase in operating activity was partially offset by $22.6 million more in
net
interest and taxes paid in the first half of 2007, compared with the same period
in 2006.
Investing
activities: Cash paid for the acquisition of Actaris was approximately
$1.7 billion. In the first quarter of 2007, $35.0 million in
short-term investments matured with the proceeds used to partially fund the
acquisition. The acquisition of property, plant and equipment increased $3.9
million in the first six months of 2007, compared with the same period in 2006,
primarily due to Actaris’ activity subsequent to the acquisition.
Financing
activities: Proceeds from our new credit facility were $1.2 billion. Debt
placement fees associated with this facility were $23.1 million. Net proceeds
from the sale of common stock provided $225.3 million. Cash generated from
the
exercise of stock-based awards was $10.9 million during the first six
months of 2007, compared with $11.3 million in the same period in 2006.
Excess tax benefits from stock-based compensation were $5.0 million in the
first
six months of 2007, compared with $8.4 million for the same period in 2006.
During the six months ended June 30, 2007, we repaid $2.9 million on the credit
facility. During the first six months of 2006, we paid off various debt
balances, including the remaining $24.7 million balance on our term loan,
$14.8 million on our real estate term note and $3.2 million of project
financing debt.
Effect
of exchange rates on cash and cash equivalents: The effect of
exchange rates on the cash balances of currencies held in foreign denominations
(primarily euros) was $256,000.
We
had no
off-balance sheet financing agreements at June 30, 2007 and December 31, 2006,
except for operating lease commitments.
Liquidity,
Sources and Uses of Capital:
We
have
historically funded our operations and growth with cash flow from operations,
borrowings and issuances of common stock.
The
Actaris acquisition was financed in part by a $1.2 billion credit facility.
The
credit facility is comprised of a $605.1 million first lien U.S. dollar
denominated term loan; a €335 million first lien euro denominated term
loan; a £50 million first lien pound sterling denominated term loan
(collectively the term loans); and a $115 million multicurrency revolving
line-of-credit (multicurrency revolver), which was undrawn at close. Interest
rates on the credit facility are based on the respective borrowing
denominated LIBOR rate (U.S. dollar, euro or pound sterling) or the Wells Fargo
Bank, National Association’s prime rate plus an additional margin subject to
factors including our consolidated leverage ratio. Scheduled amortization of
principal payments is 1% per year (0.25% quarterly) with an excess cash flow
provision for additional annual principal repayment requirements. Maturities
of
the term loans and multicurrency revolver are seven years and six years,
respectively, from the date of issuance with certain acceleration features
relating to our current outstanding subordinated notes. At June 30, 2007, there
were no borrowings outstanding under the revolver and $46.0 million was utilized
by outstanding standby letters of credit resulting in $69.0 million being
available for additional borrowings.
This
credit facility replaced an original $185 million seven-year senior secured
credit facility we entered into in 2004. We repaid $24.7 million remaining
on
our 2004 senior secured term loan during the first quarter of 2006.
Senior
Subordinated Notes
Our
senior subordinated notes (subordinated notes) consist of $125 million aggregate
principal amount of 7.75% notes, issued in May 2004 and due in 2012. The
subordinated notes were discounted to a price of 99.265 to yield 7.875%. The
discount on the subordinated notes is accreted resulting in a balance of $124.4
million at June 30, 2007. The subordinated notes are registered with the SEC
and
are generally transferable. Prepaid debt fees are amortized over the life of
the
notes. Fixed interest payments of $4.8 million are required every six
months, in May and November. The notes are subordinated to our senior secured
borrowings and are guaranteed by all of our domestic operating subsidiaries.
The
subordinated notes contain covenants, which place restrictions on the incurrence
of debt, the payment of dividends, certain investments and mergers. The Actaris
acquisition and the associated financing were not prohibited under these
covenants. We were in compliance with these debt covenants at June 30, 2007.
Some or all of the subordinated notes may be redeemed at our option at any
time
on or after May 15, 2008, at their principal amount plus a specified premium.
At
any time after May 15, 2008, we may, at our option, redeem the subordinated
notes at a redemption price of 103.875%, decreasing each year
thereafter.
Convertible
Senior Subordinated Notes
On
August
4, 2006, we issued $345 million of 2.50% convertible notes due August 2026.
Fixed interest payments of $4.3 million are required every six months, in
February and August. For each six month period beginning August 2011, contingent
interest payments of approximately 0.19% of the average trading price of the
convertible notes will be made if certain thresholds and events are met, as
outlined in the indenture. The convertible notes are registered with the SEC
and
are generally transferable. Our convertible notes are not considered
conventional convertible debt as defined in Emerging Issues Task Force (EITF)
05-02, The Meaning of “Conventional Convertible Debt Instruments” in Issue
00-19, as the number of shares, or cash, to be received by the holders was
not fixed at the inception of the obligation. We have concluded that the
conversion feature of our convertible notes does not require bifurcation from
the host contract in accordance with Statement of Financial Accounting Standards
133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133), as the conversion feature is indexed to the Company’s own stock and would
be classified within stockholders’ equity if it were a freestanding instrument
as provided by EITF 00-19, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock.
The
convertible notes may be converted under the following circumstances, at the
option of the holder, at an initial conversion rate of 15.3478 shares of our
common stock for each $1,000 principal amount of the convertible notes
(conversion price of $65.16 per share), as defined in the
indenture:
o
|
during
any fiscal quarter commencing after September 30, 2006, if the closing
sale price per share of our common stock exceeds 120% of the conversion
price ($78.19) for at least 20 trading days in the 30 consecutive
trading
day period ending on the last trading day of the preceding fiscal
quarter;
|
o
|
between
July 1, 2011 and August 1, 2011, and any time after August 1,
2024;
|
o
|
during
the five business days after any five consecutive trading day period
in
which the trading price of the convertible notes for each day was
less
than 98% of the conversion value of the convertible
notes;
|
o
|
if
the convertible notes are called for
redemption;
|
o
|
if
a fundamental change occurs; or
|
o
|
upon
the occurrence of defined corporate
events.
|
The
convertible notes also contain put options, which may require us, at the
option of the holder, to repurchase all or a portion of the convertible notes
on
August 1, 2011, August 1, 2016 and August 1, 2021 at the principal amount,
plus
accrued and unpaid interest.
Upon
conversion, the principal amount of the convertible notes will be settled in
cash and, at our option, the remaining conversion obligation (stock price in
excess of conversion price) may be settled in cash, shares or a combination.
The
conversion rate for the convertible notes is subject to adjustment upon the
occurrence of certain corporate events, as defined in the indenture, to ensure
that the economic rights of the convertible notes are preserved. We
may redeem some or all of the convertible notes for cash, on or after
August 1, 2011, for a price equal to 100% of the principal amount plus accrued
and unpaid interest.
The
convertible notes are unsecured and subordinate to all of our existing and
future senior secured borrowings. The convertible notes are unconditionally
guaranteed, joint and severally, by all of our operating subsidiaries, except
for our foreign subsidiaries, all of which are wholly owned. The convertible
notes contain covenants, which place restrictions on the incurrence of debt
and
certain mergers. The Actaris acquisition and the associated financing were
not
prohibited under these covenants. We were in compliance with these debt
covenants at June 30, 2007. The aggregate principal amount of the convertible
notes is included in long-term debt as they can not be converted prior to July
2011, unless certain defined events occur. At such time the holders have the
ability to convert, we will reclassify the convertible notes from long-term
to
current to reflect the holders’ conversion rights.
Under
FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we
record a liability for certain types of guarantees and indemnifications for
agreements entered into or amended subsequent to December 31, 2002. No
liabilities were required for agreements entered into as of June 30, 2007 and
December 31, 2006.
We
maintain bid and performance bonds for certain customers. Bonds in force were
$23.8 million and $6.0 million at June 30, 2007 and December 31, 2006,
respectively. Bid bonds guarantee that we will enter into a contract consistent
with the terms of the bid. Performance bonds provide a guarantee to the customer
for future performance, which usually covers the installation phase of a
contract and may on occasion cover the operations and maintenance phase of
outsourcing contracts. We also have standby letters of credit to guarantee
our
performance under certain contracts. In addition to the outstanding standby
letters of credit under our credit facility, our Actaris operating segment
has
unsecured revolving lines of credit totaling €7.2 million, £1.0 million and $6.4
million, denominated in euros, pound sterling and U.S. dollars, respectively,
with total outstanding standby letters of credit of $1.9 million at June 30,
2007. The total outstanding amounts of standby letters of credit were $47.9
million and $23.0 million at June 30, 2007 and December 31, 2006,
respectively.
Our
net
deferred tax assets consist primarily of accumulated net operating losses and
tax credits that can be carried forward, some of which are limited by Internal
Revenue Code Sections 382 and 383 (Section 382 and Section 383). The limited
deferred tax assets resulted primarily from acquisitions. We expect to
utilize tax loss carryforwards and available tax credits to offset taxes
otherwise due on regular taxable income in upcoming years. For 2007, we expect
cash payments for federal, state, local and foreign tax purposes to be
approximately $19.0 million based on current projections that net operating
loss
carryforwards not limited by Section 382 will be fully utilized and our
remaining tax credits not limited by Section 383 and the Alternative
Minimum Tax will be fully utilized in 2007 and 2008.
Working
capital, which includes current assets less current liabilities, was $251.6
million at June 30, 2007, compared with $492.9 million at December 31, 2006.
The
$241.3 million decrease in working capital resulted from the proceeds used
to
partially fund the acquisition of Actaris.
We
expect
to continue to expand our operations and grow our business through a combination
of internal new product development, licensing technology from or to others,
distribution agreements, partnership arrangements and acquisitions of technology
or other companies. We expect these activities to be funded with existing cash,
cash flow from operations, borrowings and the issuance of common stock or other
securities. We believe existing sources of liquidity will be sufficient to
fund
our existing operations and obligations for at least the next year and
foreseeable future, but offer no assurances. Our liquidity could be affected
by
the stability of the energy and water industries, competitive pressures,
international risks, intellectual property claims and other factors described
under “Risk Factors” within Item 1A of Part 1 of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, which was filed with
the SEC on February 23, 2007, as well as in our “Quantitative and Qualitative
Disclosures About Market Risk” within Item 3 of Part 1 included in this
Quarterly Report on Form 10-Q.
Contingencies
We
are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood
of
any adverse judgments or outcomes related to legal matters, as well as ranges
of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue
in
accordance with SFAS 5, Accounting for Contingencies (SFAS 5), and
related pronouncements. In accordance with SFAS 5, a liability is recorded
when
we determine that a loss is probable and the amount can be reasonably estimated.
Additionally, we disclose contingencies for which a material loss is reasonably
possible, but not probable. Legal contingencies at June 30, 2007 and December
31, 2006 were not material to our financial condition and results of
operations.
We
generally provide an indemnification related to the infringement of any patent,
copyright, trademark or other intellectual property right on software or
equipment within our sales contracts, which indemnifies the customer from and
pays the resulting costs, damages and attorney’s fees awarded against a customer
with respect to such a claim provided that (a) the customer promptly
notifies us in writing of the claim and (b) we have the sole control of the
defense and all related settlement negotiations. The terms of the
indemnification normally do not limit the maximum potential future payments.
We
also provide an indemnification for third party claims resulting from damages
caused by the negligence or willful misconduct of our employees/agents in
connection with the performance of certain contracts. The terms of the
indemnification generally do not limit the maximum potential
payments.
Critical
Accounting Policies
Revenue
Recognition: The majority of our revenues are recognized when products are
shipped to or received by a customer or when services are provided. We have
certain customer arrangements with multiple elements. For such arrangements,
we
determine the estimated fair value of each element and then allocate the total
arrangement consideration among the separate elements based on the relative
fair
value percentages. Revenues for each element are then recognized based on the
type of element, such as 1) when the products are shipped, 2) services are
delivered, 3) percentage of completion when implementation services are
essential to the software performance, 4) upon customer acceptance provisions
or
5) transfer of title. Fair values represent the estimated price charged when
an
item is sold separately. We review our fair values on an annual basis or more
frequently if a significant trend is noted.
We
recognize revenue for delivered elements when the delivered elements have
standalone value and we have objective and reliable evidence of fair value
for
each undelivered element. In the absence of fair value of a delivered element,
we allocate revenue first to the fair value of the undelivered elements and
the
residual revenue to the delivered elements. If the fair value of any undelivered
element included in a multiple element arrangement can not be objectively
determined, revenue is deferred until all elements are delivered and services
have been performed, or until fair value can objectively be determined for
any
remaining undelivered elements.
Revenue
can vary significantly from period to period based on the timing of orders
and
the application of revenue recognition criteria. Use of the percentage of
completion method for revenue recognition requires estimating the cost to
complete a project. The estimation of costs through completion of a project
is
subject to many variables such as the length of time to complete, changes in
wages, subcontractor performance, supplier information and business volume
assumptions. Changes in underlying assumptions/estimates may adversely or
positively affect financial performance. Hardware and software post-sale
maintenance support fees are recognized ratably over the performance
period.
Unearned
revenue is recorded for products or services when the criteria for revenue
recognition have not been met. The majority of unearned revenue relates to
annual billings for post-sale maintenance and support agreements. Shipping
and
handling costs billed to customers are recorded as revenue, with the associated
cost charged to cost of revenues.
Warranty:
We offer industry standard warranties on our hardware products and large
application software products. Standard warranty accruals represent the
estimated cost of projected warranty claims and are based on historical and
projected product performance trends, business volume assumptions, supplier
information and other business and economic projections. Testing of new products
in the development stage helps identify and correct potential warranty issues
prior to manufacturing. Continuing quality control efforts during manufacturing
reduce our exposure to warranty claims. If our quality control efforts fail
to
detect a fault in one of our products, we could experience an increase in
warranty claims. We track warranty claims to identify potential warranty trends.
If an unusual trend is noted, an additional warranty accrual may be assessed
and
recorded when a failure event is probable and the cost can be reasonably
estimated. Management continually evaluates the sufficiency of the warranty
provisions and makes adjustments when necessary. The warranty allowances may
fluctuate due to changes in estimates for material, labor and other costs we
may
incur to replace projected product failures, and we may incur additional
warranty and related expenses in the future with respect to new or established
products.
Inventories:
Items are removed from inventory using the first-in, first-out method.
Inventories include raw materials, sub-assemblies and finished goods. Inventory
amounts include the cost to manufacture the item, such as the cost of raw
materials, labor and other applied direct and indirect costs. We also review
idle facility expense, freight, handling costs and wasted materials to determine
if abnormal amounts should be recognized as current-period charges. We review
our inventory for obsolescence and marketability. If the estimated market value,
which is based upon assumptions about future demand and market conditions,
falls
below the original cost, the inventory value is reduced to the market value.
If
technology rapidly changes or actual market conditions are less favorable than
those projected by management, inventory write-downs may be
required.
Goodwill
and Intangible Assets: Goodwill and intangible assets result from our
acquisitions. We use estimates in determining the value of goodwill and
intangible assets, including estimates of useful lives of intangible assets,
discounted future cash flows and fair values of the related operations. We
test
goodwill for impairment each year as of October 1, under the guidance of SFAS
142, Goodwill and Other Intangible Assets. We forecast discounted
future cash flows at the reporting unit level, which consists of our segments,
based on estimated future revenues and operating costs, which take into
consideration factors such as existing backlog, expected future orders, supplier
contracts and general market conditions. Changes in our forecasts or cost of
capital may result in asset value adjustments, which could have a significant
effect on our current and future results of operations and financial condition.
Intangible assets with a finite life are amortized based on estimated discounted
cash flows, unless discounted cash flows can not be relied upon, in which case
the intangible assets are amortized straight-line, over estimated useful lives
and are tested for impairment when events or changes in circumstances indicate
the carrying value may not be recoverable.
Stock-Based
Compensation: We measure compensation cost for stock-based awards at fair
value and recognize compensation over the service period for awards expected
to
vest. We use the Black-Scholes option-pricing model, which requires the input
of
assumptions, including the estimated length of time employees will retain their
vested stock options before exercising them (expected term) and the estimated
volatility of our common stock’s price over the expected term. Furthermore, in
calculating compensation for these awards, we are also required to approximate
the number of options that will be forfeited prior to completing their vesting
requirement (forfeitures). We consider many factors when estimating expected
forfeitures, including types of awards, employee class and historical
experience. To the extent actual results or updated estimates differ from our
current estimates, such amounts will be recorded as a cumulative adjustment
in
the period estimates are revised.
Deferred
Income Taxes: We adopted the provisions of FIN 48 on January 1, 2007. This
interpretation addresses the determination of whether tax benefits claimed
or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, we may recognize the tax benefit from an uncertain
tax
position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has
a
greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognizing, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. As of January 1, 2007 and June 30, 2007, the
amount of unrecognized tax benefits was $6.1 million and $35.9 million, of
which $6.1 million and $6.9 million would, if recognized, affect our actual
tax rate, respectively. We do not expect any reasonably possible material
changes to the estimated amount of liability associated with our unrecognized
tax benefits through June 30, 2008.
Legal
Contingencies: We are subject to various legal proceedings and claims of
which the outcomes are subject to significant uncertainty. Our policy is to
assess the likelihood of any adverse judgments or outcomes related to legal
matters, as well as ranges of probable losses. A determination of the amount
of
the liability required, if any, for these contingencies is made after an
analysis of each known issue in accordance with SFAS 5, and related
pronouncements. In accordance with SFAS 5, a liability is recorded when we
determine that a loss is probable and the amount can be reasonably estimated.
Additionally, we disclose contingencies for which a material loss is reasonably
possible, but less than probable. Legal contingencies at June 30, 2007 and
December 31, 2006 were not material to our financial condition and results
of
operations.
Derivative
Instruments: We account for derivative instruments and hedging activities
in accordance with SFAS 133, as amended. All derivative instruments, whether
designated in hedging relationships or not, are required to be recorded on
the
Condensed Consolidated Balance Sheets at fair value as either assets or
liabilities. If the derivative is designated as a fair value hedge, the changes
in the fair value of the derivative and of the hedged item attributable to
the
hedged risk are recognized in earnings. If the derivative is designated as
a
cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded as a component of other comprehensive income (loss)
and
are recognized in earnings when the hedged item affects earnings; ineffective
portions of fair value changes or derivative instruments that do not qualify
for
hedging activities are recognized in earnings. Derivatives are not used for
trading or speculative purposes.
Compensation
Plans: We have compensation plans that offer a range of award amounts for
the achievement of various annual performance and financial targets. Actual
award amounts will be determined at the end of the year if the performance
and
financial targets are met. As the bonuses are being earned during the year,
we
must estimate a compensation accrual each quarter based on the progress towards
achieving the goals, the estimated financial forecast for the year and the
probability of achieving various results. An accrual is recorded if management
deems it probable that a target will be achieved and the amount can be
reasonably estimated. Although we monitor our annual forecast and the progress
towards achievement of goals, the actual results at the end of the year may
warrant a bonus award that is significantly greater or less than the assessments
made in earlier quarters.
Defined
Benefit Pension Plans: As part of the Actaris
acquisition, we assumed Actaris’ defined benefit pension plans. Actaris sponsors
both funded and unfunded non-U.S. defined benefit pension plans. FASB Statement
87, Employers' Accounting for Pensions, as amended by
SFAS 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans (SFAS 158), requires the assignment of the purchase
price to individual assets acquired and liabilities assumed to include a
liability for the projected benefit obligation in excess of plan assets or
an
asset for plan assets in excess of the projected benefit obligation, thereby
eliminating any previously existing net gain or loss, prior service cost or
credit or transition asset or obligation recognized in accumulated other
comprehensive income (loss). SFAS 158 also requires employers to recognize
the
funded status of their defined benefit pension plans on their consolidated
balance sheet and recognize as a component of other comprehensive income (loss),
net of tax, the actuarial gains or losses, prior service costs or credits and
transition assets or obligations, if any, that arise during the period but
are
not recognized as components of net periodic benefit cost. We use a discount
rate that is based on the date of acquisition, which will be updated on an
annual basis as of December 31 of each
year.
In future reporting periods, the adjustment for a change in the discount rate
will be recognized in other comprehensive income (loss) in the period in which
it occurs.
Business
Combinations: In accordance with SFAS 141, Business Combinations,
we record the results of operations of an acquired business from the date of
acquisition. We make preliminary allocations of the purchase price to the assets
acquired and liabilities assumed based on estimated fair value assessments.
Once
we finalize the fair values, we may have changes to the carrying values of
tangible and intangible assets, goodwill, commitments and contingencies,
deferred taxes and restructuring activities. Amounts initially allocated
to IPR&D are expensed in the period of acquisition, with the costs
to complete the IPR&D expensed in the subsequent period incurred. We may
experience unforeseen problems in the development or performance of the
IPR&D; we may not meet our product development schedules; or we may not
achieve market acceptance of these new products or solutions.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS
157), which defines fair value, establishes a framework for measuring fair
value
and expands disclosures about fair value measurements. SFAS 157 is effective
for
fiscal years beginning after November 15, 2007, on a prospective basis. We
are
currently evaluating the impact of the adoption of SFAS 157 on our
financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (SFAS 159). This statement permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains
and
losses on items for which the fair value option has been elected would be
reported in net income. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of the adoption of
SFAS 159 on our financial statements.
Item
3: Quantitative and Qualitative
Disclosures About Market Risk
In
the
normal course of business, we are exposed to interest rate and foreign currency
exchange rate risks that could impact our financial position and results of
operations. Our risk management strategy with respect to these market risks
may
include the use of derivative financial instruments. We use derivative contracts
only to manage existing underlying exposures. Accordingly, we do not use
derivative contracts for speculative purposes.
Interest
Rate Risk: The table below provides information about our financial
instruments that are sensitive to changes in interest rates. Weighted average
variable rates in the table are based on implied forward rates in the Wells
Fargo swap yield curve as of July 11, 2007 and our estimated ratio of funded
debt to EBITDA, which determines our rate margin. The table below illustrates
the scheduled minimum repayment of principal over the remaining lives of our
debt at June 30, 2007.
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Beyond
2011
|
|
|
Total
|
|
|
(in
millions)
|
Fixed
Rate Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
senior subordinated
notes (1)
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
345.0
|
|
|
$ |
345.0
|
Interest
rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
subordinated notes
(2)
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
125.0
|
|
|
$ |
125.0
|
Interest
rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate Debt
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Dollar Term Loan
|
|
$ |
3.0
|
|
|
$ |
6.0
|
|
|
$ |
6.0
|
|
|
$ |
6.0
|
|
|
$ |
6.0
|
|
|
$ |
576.6
|
|
|
$ |
603.6
|
Average
interest rate
|
|
|
8.37 |
% |
|
|
8.39 |
% |
|
|
8.41 |
% |
|
|
8.47 |
% |
|
|
8.52 |
% |
|
|
8.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
term loan
|
|
$ |
2.3
|
|
|
$ |
4.5
|
|
|
$ |
4.5
|
|
|
$ |
4.5
|
|
|
$ |
4.5
|
|
|
$ |
429.5
|
|
|
$ |
449.8
|
Average
interest rate
|
|
|
7.25 |
% |
|
|
7.63 |
% |
|
|
7.77 |
% |
|
|
7.80 |
% |
|
|
7.81 |
% |
|
|
7.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GBP
term loan
|
|
$ |
0.5
|
|
|
$ |
1.0
|
|
|
$ |
1.0
|
|
|
$ |
1.0
|
|
|
$ |
1.0
|
|
|
$ |
95.3
|
|
|
$ |
99.8
|
Average
interest rate
|
|
|
9.04 |
% |
|
|
9.29 |
% |
|
|
9.30 |
% |
|
|
9.28 |
% |
|
|
9.24 |
% |
|
|
9.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
$345.0
million of 2.50% convertible notes due on August 2026, with fixed
interest
payments of $4.3 million due every six months in February and August
(see
Note 7).
|
(2)
The $125.0
million aggregate principal amount of 7.75% senior subordinated
notes, due
in 2012, was discounted to 99.265 per $100 of principal to yield
7.875%
(see Note 7).
|
(3)
The Actaris
acquisition was financed in part by a $1.2 billion senior secured
credit
facility. The facility is comprised of $605.1 million, €335 million and
£50 million denominated in USD, EUR and GBP, respectively (see Note
7).
|
Based
on
a sensitivity analysis as of June 30, 2007, we estimate that if market interest
rates average one percentage point higher in 2007, than in the table above,
our
earnings before income taxes in the second half 2007 would decrease by
approximately $5.3 million.
As
part
of the acquisition of Actaris Metering Systems SA (Actaris) on April 18, 2007,
we entered into a $1.2 billion credit facility, comprised of a $605.1 million
first lien U.S. dollar denominated term loan; a €335 million first lien
euro denominated term loan; a £50 million first lien pound sterling
denominated term loan (collectively the term loans); and a $115 million
multicurrency revolving credit facility (multicurrency revolver), which was
undrawn at close. Interest rates on the credit facility are based on the
respective borrowing denominated LIBOR rate (U.S. dollar, euro or pound
sterling) or the Wells Fargo Bank, National Association’s prime rate plus an
additional margin subject to factors including our consolidated leverage ratio.
Scheduled amortization of principal payments is 1% per year (0.25% quarterly)
with an excess cash flow provision for additional annual principal repayment
requirements. Maturities of the term loans and multicurrency revolver are seven
years and six years, respectively, from the date of issuance with certain
acceleration features relating to our current outstanding subordinated notes.
These variable rate financial instruments are sensitive to changes in interest
rates. We will monitor and assess our interest rate risk and may institute
interest rate swaps or other derivative instruments to mange interest rate
risk.
Foreign
Currency Exchange Rate Risk: We conduct business in a number of foreign
countries and, therefore, face exposure to adverse movements in foreign currency
exchange rates. As a result of the Actaris acquisition, commencing in the second
quarter of 2007 a majority of our revenues and operating expenses are now
denominated in foreign currencies, resulting in changes in our foreign currency
exchange rate exposures that could have a material effect on our financial
results. International revenues were 63% and 48% of total revenues for the
three
and six months ended June 30, 2007.
Our
primary foreign currency exposure relates to non-U.S. dollar denominated
revenues, cost of revenues and operating expenses in our foreign subsidiary
operations, the most significant of which is the euro. We have historically
not
used derivative instruments to manage foreign exchange rate changes. However,
in
future periods, we may use a combination of derivative contracts to protect
against the foreign currency exchange rate risks. Alternatively, we may choose
not to hedge the foreign currency risks associated with our foreign currency
exposures if such exposure acts as a natural foreign currency hedge for other
offsetting amounts denominated in the same currency.
Risk-sensitive
financial instruments in the form of intercompany trade receivables and notes
are mostly denominated in the local foreign currencies. As foreign currency
exchange rates change, intercompany trade receivables may affect current
earnings, while intercompany notes, for which settlement is not planned or
anticipated in the foreseeable future, may be revalued and result in unrealized
translation gains or losses that are reported in accumulated other comprehensive
income (loss).
Because
our earnings are affected by fluctuations in the value of the U.S. dollar
against foreign currencies, we have performed a sensitivity analysis assuming
a
hypothetical 10% increase or decrease in the value of the dollar relative to
the
currencies in which our transactions are denominated. At June 30, 2007, the
analysis indicated that such market movements would have changed our results
from operations by approximately $5 million. The model assumes foreign currency
exchange rates will shift in the same direction and relative amount. However,
exchange rates rarely move in the same direction. This assumption may result
in
the overstatement or understatement of the effect of changing exchange rates
on
assets and liabilities denominated in a foreign currency. Consequently, the
actual effects on operations in the future may differ materially from results
of
the analysis for the six months ended June 30, 2007. We may, in the future,
experience greater fluctuations in U.S. dollar earnings from fluctuations in
foreign currency exchange rates, particularly due to the Actaris acquisition.
We
will continue to monitor and assess the effect of currency fluctuations and
may
institute hedging alternatives.
We
may be
exposed to certain market risks arising from particular transactions. As part
of
our funding necessary to complete the Actaris Metering Systems (Actaris)
acquisition, we entered into foreign currency range forward contracts
(transactions where put options were sold and call options were purchased)
to
reduce our exposure to declines in the value of the U.S. dollar and pound
sterling relative to the euro denominated purchase price. Under SFAS 133, the
Actaris stock purchase agreement was considered an unrecognized firm commitment;
therefore, these foreign currency range forward contracts could not be
designated as fair value hedges. In April 2007, we completed the acquisition
of
Actaris and realized a $2.8 million gain from the termination of the
foreign currency range forward contracts.
Item
4: Controls and
Procedures
(a)
|
Evaluation
of disclosure controls and procedures. An evaluation was performed
under the supervision and with the participation of our Company’s
management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Company’s
disclosure controls and procedures (as such term is defined in
Rules
13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934
as
amended. Based on that evaluation, the Company’s management, including the
Chief Executive Officer and Chief Financial Officer, concluded
that the
Company’s disclosure controls and procedures were effective as of
June 30, 2007. There are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding
of the
controls and procedures. Accordingly, even effective disclosure
controls
and procedures can only provide reasonable assurance of achieving
their
control objectives.
|
(b)
|
Changes
in internal controls over financial reporting. Other than the
acquisition of Actaris Metering Systems SA (Actaris) on April 18,
2007,
which is described in the following paragraph, there have been
no changes
in internal control over financial reporting during the quarter
ended June
30, 2007 that have materially affected, or are reasonably likely
to
materially affect, our internal controls over financial
reporting.
|
On
April
18, 2007, we completed the acquisition of Actaris. This business represents
a
separate operating segment with total assets of $2.3 billion at the date of
acquisition and revenues of $249.6 million for the period from the date of
acquisition through June 30, 2007. This acquisition resulted in material changes
to our processes and procedures affecting internal control over financial
reporting.
We
are
subject to various legal proceedings and claims of which the outcomes are
subject to significant uncertainty. Our policy is to assess the likelihood
of
any adverse judgments or outcomes related to legal matters, as well as ranges
of
probable losses. A determination of the amount of the liability required, if
any, for these contingencies is made after an analysis of each known issue
in
accordance with Statement of Financial Accounting Standards (SFAS) 5,
Accounting for Contingencies. In accordance with SFAS 5, a liability is
recorded when we determine that a loss is probable and the amount can be
reasonably estimated. Additionally, we disclose contingencies for which a
material loss is reasonably possible, but less than probable. Legal
contingencies at June 30, 2007 and December 31, 2006 were not material to our
financial condition and results of operations.
There
were no material changes during the second quarter of 2007 from risk factors
as
previously disclosed in Item 1A included in our Annual Report on Form 10-K
for
the fiscal year ended December 31, 2006, which was filed with the SEC on
February 23, 2007.
Item
4: Submission of Matters to a Vote of
Security Holders
Itron
held its annual meeting of shareholders on May 15, 2007. One director, Gary
E.
Pruitt, was elected for a term of one year and one director, Kirby A. Dyess,
was
elected for a term of two years. Three directors, Thomas S. Glanville, Sharon
L.
Nelson and LeRoy D. Nosbaum were elected for a term of three years. Michael
B.
Bracy, Ted C. DeMerritt, Jon E. Eliassen, Charles H. Gaylord, Jr. and Graham
M.
Wilson continued their terms as directors. The following summarizes all matters
voted on at the meeting.
Matter
1:
The vote for the nominated directors was as follows:
NOMINEE
|
|
IN
FAVOR
|
|
WITHHELD
|
Gary
E. Pruitt
|
|
20,949,318
|
|
404,170
|
Kirby
A. Dyess
|
|
21,024,428
|
|
329,060
|
Thomas
S. Glanville
|
|
21,023,870
|
|
329,618
|
Sharon
L. Nelson
|
|
20,990,294
|
|
363,194
|
LeRoy
D. Nosbaum
|
|
19,387,041
|
|
1,966,447
|
Matter
2:
Approval of amendment to the Amended and Restated 2000 Stock Incentive Plan
to
increase the authorized shares.
IN
FAVOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER
NON-VOTES
|
16,063,522
|
|
1,335,458
|
|
18,350
|
|
3,936,158
|
Matter
3:
Ratification of the appointment of Deloitte & Touche LLP as the Company’s
independent registered public accounting firm for the 2007 fiscal
year.
IN
FAVOR
|
|
AGAINST
|
|
ABSTAIN
|
|
BROKER
NON-VOTES
|
21,219,024
|
|
120,103
|
|
14,361
|
|
-
|
At
a
meeting on May 21, 2007, the Audit/Finance Committee of the Board of Directors
of Itron, Inc. selected Ernst & Young LLP to replace Deloitte & Touche
LLP as Itron’s independent registered public accounting firm.
(a)
No
information was required to be disclosed in a report on Form 8-K during the
second quarter of 2007 that was not reported.
(b)
Not
applicable.
Exhibit
Number
|
|
Description
of Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, in the City of Liberty Lake, State
of Washington, on the 9th day of August, 2007.
|
By:
|
/s/
STEVEN M. HELMBRECHT
|
|
|
Steven
M. Helmbrecht
Sr.
Vice President and Chief Financial
Officer
|